It’s too early to celebrate

Masahiro Nozaki (Left) and Peter Breuer (Right)

The IMF loan is going to be added to the already unpaid debts of more than 50 billion USD which has to be repaid

Some of the responses of the ruling parties and some in the Opposition parties on the approval of the bailout package for Sri Lanka by the International Monetary Fund (IMF) on Monday were amusing.   

The package was agreed upon at the Staff Level discussions between Sri Lanka and the IMF on September 1, last year and was approved by the Executive Board of the IMF after much haggling over the restructuring of Sri Lanka’s debts.  

The IMF programme for Sri Lanka contained so many components, such as a loan from the International lender to Sri Lanka which is to be disbursed throughout a period of four years, debt repayments, restructuring of the country’s external debts, conditions for increasing State revenue and reducing public expenditure, a safety net for the poor, a long-term plan to reduce public debt, proposals for public enterprises reform and addressing corruption vulnerabilities.   

Only the loan which was then said to be around US$ 2.9 billion that has to be approved was clearly in the public domain for the past six months since the Staff-Level agreement was made.   

The Opposition demands for the submission of the details of that agreement in Parliament was repeatedly shot down by members of the Cabinet majority of whom too seem to be in the dark about those details.   

When the news that the Executive Board of the IMF had approved the Staff Level agreement came on Monday, people knew only a loan of about US$ 3 billion was on its way towards Sri Lanka and some of them in some areas in the country celebrated the news by lighting crackers.   

It was a celebration of a loan which is going to be added to the already unpaid debts of more than 50 billion US Dollars which has to be repaid by us or our children in the future. 

The fact that these incidents were Stage-managed by the local politicians of the two ruling parties is clear. They resort to such antics to provoke the members of the Opposition parties or to boost the morale of the members of their parties, the popularity of which is at a low ebb these days.   

Considering the fact that the IMF programme is the only option the country had to escape from the current economic disaster, an apolitical person too would have justifiably been happy on Monday.   

The Main Opposition in Parliament, the Samagi Jana Balawegaya (SJB) endorsed the Government’s move to seek the assistance of the IMF, while the National People’s Power (NPP) or the Jathika Jana Balawegaya (JJB) led by the Janatha Vimukthi Peramuna (JVP) has not decisively protested against the IMF involvement. In fact, the SJB has been pressing the Gotabaya Rajapaksa Government since mid-2021 to discuss the foreign exchange issue that the country had faced with then with the IMF.   

The JVP too had pointed out the need to negotiate with the creditor countries to restructure the country’s debts. Gotabaya Rajapaksa Government that rejected all those views finally reversed its stance in March last year and started talks with the Washington-based lender.   

Whilst the country was in political turmoil as the protestors against the skyrocketing prices of essential items, and the unprecedented oil and gas shortages that created miles and weeks long queues, Gotabaya Rajapaksa Government in May, last year selected Lazard and Clifford Chance, two international firms to advise itself on financial and legal matters on debt restructuring, which has to go hand in hand with the IMF bailout programme.   
Notwithstanding the political crisis that led to the regime change last year and the country having declared bankruptcy, the talks between the Government and the IMF went ahead and a Staff Level agreement was reached on September 1.   

The agreement envisaged the IMF assisting Sri Lanka to rebuild its financial sector stability and offering an Extended Fund Facility (EFF) of about 2.9 billion US Dollars but contingent on the creditor countries’ willingness to debt structuring.   

In fact, there was no room for change in this programme or the nature of conditions of the IMF or the advice of two international firms, even if President Gotabaya Rajapaksa had continued to stay in power. Yet, theres no doubt that President Ranil Wickremesinghe’s experience may have eased the process.   

The SJB says that it would have changed the tax proposals which have been agreed upon by the Government and the IMF if it were in power.   

However, during a virtual press briefing on the IMF-Supported EFF Programme, Peter Breuer, IMF’s Senior Mission Chief for Sri Lanka strongly justified the tax reforms agreed upon, though while claiming that those adjustments are very brutal. 

Responding to a question about the Government’s recent statement after trade union protests that it will consider changes to the tax policy; he said Sri Lanka is amongst the countries that collect the least amount of fiscal revenue in the world.   

He made a strong contention that the tax rates proposed under the programme are also in line with similar countries who are contributing to Sri Lanka’s support package through the IMF.   

He also argued that “there are many countries out there who have income levels comparable or maybe less than Sri Lanka with much higher income tax rates.”   

This indicates tough and tense days ahead between the Government and the trade unions.   And a wealth tax is also a part of the programme, apart from the introduction of property tax and wealth transfer tax which has been envisaged in 2025, as Masahiro Nozaki, the IMF Mission Chief for Sri Lanka explained at the Press briefing.   

Besides, the IMF says “it is now essential to continue the reform momentum under strong ownership by the authorities and the Sri Lankan people more broadly.” 

The country cannot renege on its commitments now as the disbursements of the EFF will be tied to reviews that take place every six months.   

The Extended Fund Facility has repayment periods ranging from 4.5 to 10 years, according to Breuer who said the profile of repayments to the IMF from Sri Lanka includes repayments of funds just approved, as well as outstanding balances, a matter difficult to celebrate.  

Although the official bilateral creditors have given their assurance on debt structuring, the specifics have to be discussed between the Sri Lankan authorities and those countries.   

However, Sri Lanka needs to present that restructuring strategy and it has committed to do that by the end of April. 
 Transparency and comparability of treatment for all external creditors in this process might be a challenging task, but President Wickremesinghe has given that assurance in an open letter to official bilateral creditors. And the IMF says its staff will continue to assist Sri Lankan authorities with creditor coordination in line with the IMF’s policies.  
The fact that the IMF’s disbursements are not tied to specific spending and restructuring local debt is a matter that has to be decided by the government and would be a consolation for the Sri Lankan leaders.   

Nozaki said the Government can transform the IMF disbursement into rupees and then use it for Government expenditure or repaying Government loans.  

However, one of the most difficult tasks might be to keep the commitments with regard to introducing structural reforms to address corruption vulnerabilities and to maintain a corruption-free environment at least till the last disbursement of the EFF reaches the shores.  

The Government is to introduce anti-corruption legislation in line with UN Convention against Corruption. IMF representatives said it includes both asset declaration and asset recovery. 

In a country where abusing laws and impunity is the norm, this would be a Herculean task. And if the law takes its course, only a few of the current politicians would be in the field.   

Sri Lanka has been given several important specific long-term targets under the IMF programme such as public debt which was at 128 per cent of GDP as of the end of 2022 should reach 95 per cent of GDP by 2032.  
It is not clear whether the Government has such a long-term recovery plan with a specific road map.

   
Such a plan would indeed be a matter of celebration. If the Government failed in this, the country might slip into the same abyss and will have to take to the begging bowl again.