Budget for IMF with Fiscal Waterboarding

IMF officials Peter Breuer with Masahiro Nozaki who were in Colombo recently, announced that the IMF preliminarily agreed to extend a US$2.9 billion loan to Sri Lanka to help restore economic stability. 

Last week in Colombo might have appeared eventful. An Interim Budget was announced for the last four months of the year, a Staff Level agreement was reached with the International Monetary Fund (IMF) and Gotabaya Rajapaksa returned to the country after close to two months on the run. 

In reality, it was all as expected and only signifies that it is business as usual for the ruling elite. The Budget with more austerity measures was announced merely to woe the IMF. The IMF agreement as articulated by its officers said exactly what was expected; a mere US$ 2.9 billion bailout and even those funds will only be disbursed after Sri Lanka restructures its debt with its creditors. Rajapaksa’s return made it clear that his party SLPP is still firmly in control of state power. 
While there are no major surprises in the economic and political trajectory of the country over the last many weeks, the situation of the working people is one of slowly strangling them to death. Former Greek Finance Minister Yanis Varoufakis characterisation of the bailout agreement in Greece in 2015 as one of “fiscal waterboarding” is an apt description of developments in Sri Lanka.

Overwhelming austerity

There is no meaningful relief for the people in the Budget. It merely includes more of the austerity policies the country has seen over the last six months, but now legitimised by the Budget. Indeed, the economic policies are completely in line with the IMF recommendations in its Staff Report made public in March 2022.
The regressive Value Added Tax (VAT) has been increased back to 15% despite the tremendous rise in cost of living. Measures are being put in place to privatise state owned enterprises particularly of utilities. This amounts to selling the family silver, but sections of the elite are thrilled. Of course they would be thrilled because there is no mention of a wealth tax or any measures of redistribution to address the crisis. And the social and economic costs of such privatising national enterprises will be borne by the working people in the years ahead with higher utility costs. 

In the context of food inflation now above 90%, including a fivefold rise in the price of bread from Rs. 60 last year to Rs. 300 announced few days ago, there is little relief for the people. Interest rates were increased to 15.5% from 6% this year bankrupting many, as effective interest rates are on the order of 25% to 30%. Subsidies for essential goods and services were cut or inflated away, with fuel prices in particular rising three or four fold crippling informal livelihoods.
For the close to 2.5 million families who receive targeted social support, consisting of those on the Samurdhi list and on the waiting list, they can expect to receive between Rs. 5,000 and Rs. 7,500 per month. That means they will be able to afford between half a loaf and three quarters of a loaf of bread a day. This is the kind of “targeted social support” that the national and international economic establishment and the Colombo elite have been pontificating on, and claiming that the IMF will generously support.

Banal agreement

The manner and the timing of Sri Lanka’s default on its external debt in April this year signified that the economic policy establishment in Sri Lanka had surrendered to the IMF and thrown away any bargaining power. And as expected, the banal agreement that Sri Lanka is now signing with the IMF, is all that is in the recipe book of the IMF. Indeed, the interim Budget is all about assuring the IMF that immediately and in the Budget for next year, Sri Lanka will dance to the IMF’s tune. In fact, the IMF in its press release announcing Staff Level Agreement has congratulated Sri Lanka for already implementing its recommendations. That these policies have been suffocating the working people with malnutrition and starvation is of little concern to the Government, the IMF and those celebrating the agreement.

But not all is well for the neoliberals in Colombo. Their miscalculated push for default on external debt has put the country into a trap with no bridge financing, international development projects being put on hold, and the complete collapse of the economy. Indeed, the IMF itself in its press release claims it is expecting Sri Lanka’s economy to shrink by 8.7%. That is negative 8.7% GDP growth! And what does the IMF offer, US$ 2.9 billion over four years, which is US$ 60 million on the average per month. Sri Lanka’s foreign earnings are now on the order of US$ 1,500 million per month and with incentives for remittances can possibly be increased to US$ 1,800 million per month. That is our own foreign earnings can be thirty fold what the IMF is offering. So, why succumb to such depths to borrow from the IMF? It is ideology and class. Sri Lanka’s comprador elite have no vision beyond an IMF solution, and their class interests are in line to get the green light from the IMF and go borrow more from the international capital markets for their exuberant lifestyle.

The ignorance and interests of the elite will come back to bite us all. There will be many a slip in negotiating with the international creditors, and they will extract more than a pound of flesh. And a country that has defaulted will take years before it can borrow from the international capital markets unless we are ready to pay predatory interest rates that would be akin to what women subjected to microfinance schemes have been facing in the country. 

So, where are we headed? The economic policies that have now been legitimised with the Interim Budget and the IMF Staff Level Agreement amounts to waterboarding. And as with the justification for extreme torture, that the “terrorists” will destroy us all if we can’t resort to waterboarding, the economic justification for fiscal waterboarding is the “hard landing” of the economy. But as we know torture is practiced after the fact, and often subjecting innocent human beings to a cruel fate. And similarly the “hard landing” talk is for those who have not seen the suffocation in the countryside underway. The economy next year will shrink even further with the austerity policies. Meanwhile Sri Lanka’s comprador elite believe they can provide dozes of oxygen with talk of targeted social support.
The class divide, including who is on which side, and who is waterboarding and who is subject to it, are becoming clear. The next wave of protests may well dwell on that divide.