IMF Budget and Economic Devastation

Budget 2023 has the singular focus of addressing the demands of the IMF. The consequences of this budget are going to be further devastation of the economy.

National budgets reveal the economic policies for the following year, and at historic moments the shift in the economic policy trajectory for a number of years. The recently announced Budget 2023 comes amidst the worst economic crisis in the country since Independence, and its commissions and omissions require careful analysis. In this context, as with the mini-budget for September to December of 2022 unveiled in August 2022, the budget for 2023 has the singular focus of addressing the demands of the IMF. The consequences of this budget are going to be further devastation of the economy. 

In the past, I have discussed at length the causes of this great economic crisis underway; particularly the open economy reforms and the neoliberal shift in the late 1970s, the second wave of neoliberalism with the post-war changes in Sri Lanka and the global financial crisis after 2008, and the disruptions with the pandemic starting in 2020. Here, I draw on a talk I gave at the Centre for Society and Religion (CSR) on November 25, 2022 and discuss the perilous situation for the country with Budget 2023 and the so-called IMF solution. 

The national economy is experiencing a hard landing. According to the World Bank, the GDP of the country is going to contract by 9.2% in 2022 and a further 4.2% in 2023. This is what is called an economic depression. Given Budget 2023, I argue we are going to see an even larger contraction next year. What does such economic contraction entail? People will lose their income streams, unemployment rises at a drastic pace and livelihoods are severely disrupted. A food crisis linked to the economic depression increases malnourishment and starvation. Our children’s education and wellbeing are affected, and we are going to lose a generation.

"Budget 2023 only seeks to address the two conditions of the IMF. First, a primary surplus by 2025, which means state revenues are to exceed state expenditure in a couple years. Second, to make financial provisions to address debt restructuring, by showing there will be adequate revenues and future loans to repay existing loans"

IMF path

The devastation underway by the so-called IMF solution began eight months ago in March this year. The recommendations of the IMF Staff Report made public in March 2022 became a reality in the months soon after, and I outline below those concrete measures underway.
The overnight devaluation of the rupee from around Rs. 200 to Rs. 360 to a dollar, with corresponding 80% increase in the prices of imported goods were passed onto the consumers. This could not have come at worse time as global commodity prices also rose with the war in Ukraine. The result was rising inflation in the latter half of 2022 on the order of 60% and food inflation reaching even 90%.

The Central Bank raised interest rates by two and a half times from 6% to 15.5%, and continues to claim this will bring inflation down. However, the high levels of inflation are not caused by the heating of the economy, but due to the one time devaluation of the rupee and rising prices in global commodity markets. The consequence of interest rate hikes are bankruptcies of SMEs, leading to the tremendous increase in unemployment and disruption of livelihoods. A liquidity crisis – where banks raise interest rates and are unwilling or incapable of lending – is making credit unavailable or unaffordable to carry out economic activities by both small firms and even rural producers such as farmers.
Market pricing energy has led to fuel prices increasing three to four fold. And there is a 50% reduction in the amount of fuel distributed in October 2022 compared to January 2022. Clearly, such a fall in the supply of fuel, including the dampening of demand with higher prices, inevitably grinds the economy to a halt.

State expenditure is drastically reduced due to austerity policies leading to the further contraction of the economy. During an economic depression, the private sector stops investing due to falling expectations of future demand for their output and households avoid expenditure to prepare for a bleak future leading to the further collapse in demand for goods and services. This was the lesson from the Great Depression of the 1930s, that the state should stimulate the economy through investment when aggregate demand is collapsing. But that wisdom is lost with the neoliberal turn, and now the IMF and Sri Lankan policymakers are blindly following the austerity route.

The consequence for our people dependent on the informal sector making over 60% of our population is disruption of their livelihoods as demand for wage labour grinds to a halt. According to a September 2022 report by the Food and Agriculture Organization of the United Nations and the World Food Programme, incomes of 40% of the households – mainly those involved in day wage labour and agriculture – have declined by 50%, while food prices have almost doubled.

Budget 2023

If this harrowing picture is the context for Budget 2023, what is in it? No stimulus for the economy, and no attempt to even address the food crisis. Agricultural production in 2022 is estimated to be 40% less, and we are likely to continue on that path next year, with no support for the agricultural sector.

Given Budget 2023, I argue we are going to see an even larger contraction next year. People will lose their income streams, unemployment rises at a drastic pace and livelihoods are severely disrupted. A food crisis linked to the economic depression increases malnourishment and starvation. Our children’s education and wellbeing are affected, and we are going to lose a generation

Budget 2023 only seeks to address the two conditions of the IMF. First, a primary surplus by 2025, which means state revenues are to exceed state expenditure in a couple of years. Second, to make financial provisions to address debt restructuring, by showing there will be adequate revenues and future loans to repay existing loans.

In Budget 2023, total government expenditure is to be Rs. 5,800 billion, of which interest payments are to be Rs. 2,200 billion and allocation for state expenditure are to be Rs. 3,600 billion. Revenues are projected at Rs. 3,400 billion, where revenues are expected to drastically increase from Rs. 1,500 billion in 2021 and Rs. 2,100 billion in 2022. Foreign and domestic financing after subtracting debt payments are estimated at Rs. 2,400 billion. The primary budget deficit next year is projected to be Rs. 211 billion or as a percentage of GDP just 0.7%. This is an impossible target unless there is devastating austerity, as the budget deficit was 5.7% in 2021 and estimated to be 4% in 2022.

This is the focus of Budget 2023, which is to address the IMF’s demands. But this is a fairy tale! Revenues are unlikely to increase even if they try to squeeze out working peoples’ incomes through VAT for the reason that the economy is in free fall. So in reality the Government will spend much less than they allocate. That has been the secret of the Treasury all along, where they make allocations in the budgets that are not dispersed when revenues targets are not met. Furthermore, foreign financing is unlikely, but there will also be no need to repay the external loans if debt restructuring is not underway.

In other words, lower revenues will be matched by lower expenditure, and if debt is restructured then debt payments will be matched by more loans. The simple logic of the budget is tremendous austerity and an economy spiralling down to rock bottom. 
With or without the IMF Agreement currently being negotiated, the IMF solution underway is crushing the working people where real wages, already down by 40%, will be repressed further. Such a cruel solution devastates working people with starvation, even as it seeks to make Sri Lanka more competitive in the global markets with tremendous reduction in the wage costs of export products. At the heart of the IMF solution is the class question. Are we going to allow the devastation of the working people and lose a generation, in order to ensure the longer term profit-making interests of the decrepit Sri Lankan elite and exploitative global capital? 

"Lower revenues will be matched by lower expenditure, and if debt is restructured then debt payments will be matched by more loans. The simple logic of the budget is tremendous austerity and an economy spiralling down to rock bottom"

IMF agenda 

How do we understand the two major conditions of a primary surplus and debt restructuring, necessary for sealing the IMF agreement and disbursement of its funds.
Peter Doyle, who had worked at the IMF for twenty years, has exposed the IMF’s agenda in Sri Lanka and Zambia, in an article on September 15, 2022 (https://www.niesr.ac.uk/blog/imfs-programs-zambia-and-sri-lanka-editions). He critiques the IMF condition of primary surplus for Sri Lanka in 2026 of 2.3% of GDP. He claims Sri Lanka’s well performing peers, including Thailand, Vietnam, India and China, have over the last two decades on the average had a primary deficit of 2% and even the IMF recommendations going forward for them is a primary deficit of 1.5%. So, why is the IMF demanding such large surplus for Sri Lanka with the attendant austerity measures, while its best performing peers have a consistent deficit? It is because the IMF is not concerned about the growth of the Sri Lankan economy, and only concerned about debt restructuring in the favour of creditors, particularly bond holders, so that the budget surplus ensures repayment of the loans. 

Debt restructuring negotiations have had little movement, despite the repeated statements of advancement claimed by the policy establishment. Sri Lanka’s debt restructuring is caught in a geopolitical game with global consequences. It was a disastrous move on the part of policy makers, egged on by neoliberal think tanks and advisors, when Sri Lanka prematurely defaulted on its external debt in April this year. It came at a moment when a mere US$ 78 million had to be repaid that month, and the next major Sovereign Bond payment of US$ 1 billion was only due three and half months later in July. Valuable time squandered without restricting imports or seeking bilateral financing, and alienating Sri Lanka’s largest bilateral donors such as China and Japan. Sri Lanka’s neoliberal morons, who know nothing about global political economy and only suck up to Western agencies, drew a rosy picture of rapid debt restructuring after default and an IMF agreement soon after surrendering to it. 

Debt restructuring is stalled because of the different interests of the major powers, in a global situation where Sri Lanka is one of the first of possibly over thirty developing countries that are facing debt problems including the possibility of default. The West led by the US will use its weight behind the IMF to put pressure on China to restructure its loans, while China sees this as a precedent for how it addresses the debt of other countries. The bond holders in the international capital markets will hold out until Sri Lanka reaches boiling point under gruelling IMF conditions and the Sri Lankan negotiators surrender with little in the form of a haircut, or a reduction of the capital owed to them. The IMF unless forced to shift by the larger geopolitical interests of the West will continue with its painful fiscal disciplining of Sri Lanka to shape its engagement with other countries in line to seek its medicine. The reality is that the neoliberals who make up Sri Lanka’s policy establishment and advisors have surrendered Sri Lanka into a geopolitical black hole of international debt despair.

"With or without the IMF Agreement currently being negotiated, the IMF solution underway is crushing the working people where real wages, already down by 40%, will be repressed further. Such a cruel solution devastates working people with starvation"

Solutions and revolts

Sri Lanka is implementing the IMF conditions even as it waits for the IMF Board approval for the disbursement of funds. The irony of this supposedly great IMF solution underway is that the IMF funds will amount to a meagre US$ 2.9 billion over 4 years, or an average of US$ 60 million a month. Compare this amount to Sri Lanka’s own foreign earnings of close to US$ 1.5 to US$ 1.8 billion per month. In other words, Sri Lanka’s external balances are much more dependent on whether Sri Lanka decides to prioritise and restrict imports and what happens in the global markets. Ultimately, it is global commodity prices with the ongoing geopolitical uncertainties and the stability of exports markets with the global recession that will have considerable impact on Sri Lanka’s balance of payments. The significant point here is that with or without the IMF agreement there needs to be course correction. The priority now is relief to the people and economic stimulus towards halting the downward spiralling contraction of the economy. 

The Rajapaksa regime mismanaged and destroyed the economy during its two and half year tenure since coming to power in November 2019. The Budget for 2023 unveiled by the Wickremesinghe-Rajapaksa regime is the culmination of the disastrous policy direction underway since March this year leading to the further devastation of the economy. The IMF agreement even if it comes through after long delays, is likely to be first of many more IMF agreements, as the economy goes through cycles of austerity and devastation. Indeed, this is the reality of the many IMF solutions around the world.

There is much at stake today, where a generation may be lost. The great powers will continue with their games, even as Sri Lanka is taken on the path to hell with promises of international solutions. The working people must awake to this reality and take democratic charge of the economy. The great revolt that came at the outset of the economic depression this year may be the first of many revolts necessary to change the dangerous political economic course of our country.