SL avoids IMF as fiscal austerity fails to resuscitate a pandemic-stricken economy

The current managers of the Sri Lankan economy have every reason to avoid going back to the International Monetary Fund (IMF) as preconditioned austerity measures and fiscal tightening that will typically accompany such a package could further suffocate an economy beset by the pandemic.

According to Danushka Samarasinghe and Anjula Nawarathna, the two researchers behind a latest report on the Sri Lankan economy by National Lanka Equities, the IMF route could be the last resort for Sri Lanka but the policymakers appear to be taking the harder route at present, trying to solve its issues on its own terms.

“The main reason for avoiding a fresh IMF programme would be the austerity measures and the fiscal tightening, which could become preconditions and hamper domestic economic growth, which could create chaos,” said Samarasinghe and Nawarathna on the prospects of the country seeking IMF assistance.  

Ajith Nivard Cabraal, the State Minister for Money, Capital Markets & State Enterprise Reforms recently said that the current economic conditions of Sri Lanka do not require IMF support. 
“The conditions that are available in Sri Lanka today would not necessarily need us to go to the IMF for any bailout,” he said. 

“We are quite confident that we can manage what we have now, and with the expected revenues and the expected foreign inflows that we have targeted, particularly from exports which have been quite robust with fairly good order books,” Cabraal added. 

While an IMF deal would be music to the ears of the rating agencies that have taken a ruthless approach towards Sri Lanka amid the pandemic, the research duo at Nation Lanka Equities, a Colombo-based stockbroking house, said the policy prescription that typically accompanies such a package could be counterproductive to the economy. 

Typical IMF financial assistance packages come with conditions for higher taxes, higher interest rates and cutting down on welfare measures—a trinity disastrous for economies struggling to rebound. 

“Thus, the Sri Lankan policymakers are of the view that fiscal tightening is not the need of the hour and would become even more disastrous to the economy which is trying to battle itself out from the pandemic infused shocks,” they added. 

Meanwhile, the current IMF Chief Economist Gita Gopinath also believes fiscal stimulus is the solution for economies battling the virus induced economic damage.