By Shirani Ranasinghe Courtesy Ceylon Today

As forex became tight, leading to disruptions in the supply of essentials and other imports, people began to take to the streets. The queues became longer and so did the crescendo of the anti-government protests. In a bid to control the situation, the Gotabaya Administration did a sudden U-turn in its policies. Changing the stance on seeking assistance from the International Monetary Fund (IMF) was one such reversal as we commenced discussions for a bailout in mid March. 

The month of March 2022 marked the beginning of one of the most turbulent periods of contemporary Sri Lankan history. Until July, the political landscape was very unstable. In that short period, the country saw three new Cabinets, escalating violence and both the democratically elected Prime Minister and President cornered and forced to resign. Yet, remarkably we continued to stay engaged with the IMF. 

The IMF was insistent that political stability is a must for discussions to proceed. Yet, the country came dangerously close to anarchy. The presidential secretariat, the highest office in the Government, was unable to function for 100 days. When Ranil Wickremesinghe, as the newly-elected President, took steps to remove agitators from this office, they were occupying the building and had caused tremendous damage to the property. Throughout this mayhem, however, the IMF never considered shutting the door in our face. 

Current Economic Status 

Yet, eight months have passed since discussions with the IMF began. Apart from a staff-level agreement that promised a USD 2.9 billion bailout package (though Sri Lanka hoped for a support of USD 4 billion) to be delivered in tranches over 48 months, no other progress has been made. It is a matter of grave concern that our only strategy to emerge from the current economic crisis is this bailout package. 

The only thing that is presently keeping us afloat is our tourism, export markets and remittances from Sri Lankan expatriates, which are slowly recovering after the pandemic. Even so, the speed of recovery is still too slow. According to the Hotels Association of Sri Lanka President M Shanthikumar, tourist arrivals are far below expectations and hence hotels are faring badly. The hotel industry is not expecting the situation to improve this year, even during this peak tourist season. 

Therefore, our economy is currently running with 40 per cent less fuel, daily power outages and signs of another gas shortage. According to Public Utilities Commission Chairman Janaka Ratnayake, we have made payments for five shipments of coal this month. We need another 33 more shipments before end April 2023 to avoid extended power cuts.

It is against these odds that our tourism and export industries work. Interest rates have nearly tripled since April. This is making life harder for the local economy.

Instead of an economic growth this year, we are expecting our economy to contract further and below zero. This is testified by the Central Bank’s need to continue with the excess monetising (money printing) by over 50 per cent than during the height of the pandemic. 

It is not only our day-to-day life that we must normalise. We must somehow find ways and means to pay our creditors and restore our credibility. 

On 12 April 2022, we took the unprecedented decision to default foreign debt repayments, totalling USD 51 billion. At that time it was thought that by doing so we could improve on our dwindling reserves. However, the hard reality is that our official Reserve Assets have dipped further by 4.2 percent to USD 1,704 million in October from USD 1,779 million in September. The forex debts accumulated but unpaid for 2nd and 3rd quarters of 2022 is estimated to be at USD 3.2 billion. 

Why is the IMF Stalling? 

State Minister Shehan Semasinghe stated earlier this month that all main bilateral creditors, including China, participated in the latest debt restructuring talks. He is confident that the process to obtain IMF loan is in final stage and IMF Board approval likely to be obtained by the year end. However, the IMF is not so sure of such a timeline. 

The main problem is Sri Lanka’s inability to fulfill IMF’s main prerequisite. Sri Lanka must first come up with a debt restructuring plan with her creditors. All eyes, including India’s, are on China. 

China holds about 12 per cent of our foreign debt. It is not only to Sri Lanka however that China has lent massively, but to most of the region and beyond. As such, China may not be in a position to accept a ‘haircut’ from Sri Lanka, without upsetting their other bilateral relations. 

Even if they could, China may not want to do so considering the shabby treatment from Sri Lanka since 2015. Yahapalana Government that succeeded the Mahinda Rajapaksa Administration came on an anti-Chinese ticket. Therefore, their stance was as expected. Surprisingly, the Gotabaya Administration in their efforts to woo India, snubbed China. 

Wickremesinghe Government has not committed any such blunders. However, if that alone is sufficient to restore relations is questionable. 

From the time we decided to obtain the IMF’s assistance, India has been extremely supportive. In fact, for the first meeting with the IMF at their headquarters, Indian Finance Minister Nirmala Sitharaman along with a high level team from the Indian Government joined the Sri Lankan delegation. They urged the IMF officials to provide assistance to Sri Lanka, which is in the throes of an unprecedented economic crisis. 

Notwithstanding this support, India too is waiting to see how the other creditors will respond to Sri Lanka’s appeal for a debt restructure. If China does not come to such an agreement, it is most likely that neither will our other creditors. 

If that remains the case, the IMF will be unable to proceed, even though we have restructured our taxes according to their recommendations. Even the budget for 2023 is modeled after the IMF’s prescriptions, revealed President Wickremesinghe. 

What the IMF Delay will Cost Us

At the time of the default Central Bank Governor Dr. Nandalal Weerasinghe solemnly assured that the domestic debt would not be restructured. However, Verité Research’s Nishan de Mel says Sri Lanka will have to restructure domestic debt if the Government failed to  achieve targets it has agreed with the IMF”. 

By declaring bankruptcy-we burnt bridges with all our creditors. Not a single Government, bank or financial institute would agree to give us loans as we have lost our credit worthiness. 

The Government is in the process of trying to increase the overseas job market. This has met with some success as countries as Saudi Arabia has agreed to open jobs for skilled labour such as nursing. 

Sending our workforce outside will bring about only short term remedies. There are other consequences such as brain drain as well as open channels to import ideologies not conducive to Sri Lankan thinking. 

We thus desperately need a road map to see our way forward. This is the time to encourage our cottage industries and strengthen local economy. Instead of simply waiting for the IMF bailout to come to our rescue, we need to be proactive and creative. 

ranasingheshivanthi@gmail.com

(The views and opinions expressed in this column are writer’s own and do not necessarily reflect the official policy or position of Ceylon Today)

BY Shivanthi Ranasinghe