Avoiding IMF won’t help us avoid austerity

Sri Lanka’s debt problems are  a topic of national conversation. Foreign reserves, already low at US $ 4 billion in May 2021 fell to US $ 2.8 billion after the most recent bond repayment of US $ 1 billion in July 2021. The government claims that the timely repayment of the bond is proof that doomsayers were wrong and that it indicates a robust economy. Is this correct?

While it is true that a default has been avoided thus far, it does not necessarily mean that the economy is sound. The recent bond repayment comes at a cost: a foreign exchange squeeze. Bond holders are being repaid but this means that foreign exchange that could otherwise have been used for imports are now being used to pay bond holders instead.

The government seems to be adamant in avoiding the bogeyman, the International Monetary Fund (IMF), perhaps to avoid the tough medication an IMF programme will bring. Yet, avoiding the IMF does not mean we can escape the inevitable austerity that will follow. Austerity is in fact already upon us, in the form of restricted imports. The restrictions are denying essential inputs to the local economy and medicines and food to citizens. These restrictions work   in two ways:
1. The outright restrictions on imports
2. The shortages of foreign exchange in the market

The government has banned or restricted imports of what is termed ‘non-essential’ items although the list includes goods like some clothing items, refrigerators and food items (live fish, tomatoes for example). 

In addition, the Central Bank’s attempts to control the rate of exchange have resulted in shortages of foreign exchange. The Central Bank has decreed an official rate of around Rs.200 but only limited amounts are being converted at these rates, resulting in a shortage of hard currency.

Banks are now rationing foreign exchange with the result that even items that are not banned are becoming unavailable.

“We cannot accommodate the requests for Letter of Credit (LCs) so we have to ration them,” a banker said. 
“There is no regulation to say to ration them but we are forced to do it.”

The import restrictions were supposed to be restricted to luxury items but the currency shortage means that even medicine and some food items seem to be running short.

While foreign bondholders will undoubtedly be pleased to have been repaid, local consumers and businesses must now suffer, making do without everyday products. The shortages in supply mean that prices rise: of whatever available imported products as well as  local products.  

This affects not only consumers but also businesses. With banks being unable to open LCs, imports of intermediate goods, even exports by SMEs, which have no access to the Board of Investment (BOI) facilities are at risk. 

Unable to trade or operate due to lack of stocks or input material, import-dependent businesses are losing out. The net result is an overall decline in economic activity and welfare of all Sri Lankans. 

A person interviewed for this report explained the difficulty in obtaining  asthma medication for his mother. He had to try four different pharmacies to get the required drugs.  He said that he believes larger stores have fewer stocks available as the volume of people going to them is much higher. 

Another respondent said chemotherapy drugs brought in from Europe were no longer available with only cheaper products from India, Bangladesh or Argentina being available. As he had no other choice, he used the substitutes for part of his wife’s chemotherapy treatment but was worried about the quality and safety. 

The knock-on effects of these are palpable. Prices of basic goods are increasing. Inflation in January 2019, according to the National Consumer Price Index (NCPI), was 127 index points, which increased to 146 in June 2021. That means prices have increased by 15 percent in little over two years as a whole. But essential food prices have increased by a lot more. Food inflation particularly has dramatically increased by 25 percent (NCPI). According to the Advocata Institute’s Buth Curry Indicator, prices of food that would be consumed in a buth curry meal have increased by 45 percent from July 2020 to July 2021.

The effects don’t end there. Importers of seeds were complaining that their sales have dropped by 50 percent because of uncertainty over fertiliser imports. These importers bring in seeds that are not produced in Sri Lanka, for vegetables like beetroot and carrots. Sales have fallen as they  are not being purchased by domestic farmers. Farmers are holding back from cultivating due to the uncertainty caused by the shortages of fertilisers needed for production. A consequence of this would be shortages and rising prices of fruits, vegetables and other produce in the coming months. This will not only affect farmers’ incomes but also result in higher consumer prices. 

The government may have to resort to importing more  food, thereby negating the impact of the fertiliser ban to begin with. Only recently, the Cabinet approved the importation of 6000 metric tonnes of rice from Pakistan to manage the shortage in the market.

This fertiliser fiasco has affected the poor disproportionately. Larger businesses are able to stock up on fertiliser but not everyone can afford to do that. It’s  the small farmers that lose out on income. The incomes of these small farmers  are in jeopardy. Coupled with the milk powder and gas shortage, prices of these essential commodities are forced to increase at an already difficult time. 

Economic policy affects the ordinary person in a society. These may be individual stories but they are certainly not one-off situations. 

The fact of the matter  is that the country is undergoing a self-imposed austerity programme in the form of import restrictions and more recently a foreign currency shortage that has resulted in the rationing of even items that are not subject to control.  

The basic principles of economics cannot be ignored in policymaking. By avoiding the IMF for fear of austerity measures has resulted in more damaging self-imposed austerity. We need to ask ourselves how sustainable this really is in the long term. The longer we wait, more stringent austerity measures will be needed. 

(Rehana Thowfeek is an economics researcher by profession. She has an MSc in Economics from the University of Warwick and a BSc in Mathematics and Economics from the University of London. She has worked previously for Sri Lanka-based think tanks Verité Research and the Institute for Health Policy. At present, she works for a US-based food technology company as a researcher. Naqiya Shiraz is Research Analyst at the Advocata Institute and can be contacted at [email protected])

(Learn more about Advocata’s work at www.advocata.org. The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute)