IMF reviews Sri Lanka's austerity measures amidst government's claim of economic stability

IMF reviews Sri Lanka's  austerity measures amidst government's claim of economic stability

Student protest against education privatization. Jan 2018

Early January, the International Monetary Fund(IMF) published its third review (staff report) of the three year Extended Arrangement under the Extended Fund Facility(EFF), which sets out its austerity demands upon which it released US$ 251.4,  the fourth tranche of the bailout money to Sri Lanka in last December. 

The EFF was approved by IMF in June 2016 to enable Sri Lanka to resolve the island nation's balance of payment crises on the strict conditions that the US backed government of  Prime Minister Ranil Wickremasinghe and President Sirisena implements economic reforms aimed at fiscal tightening, restructuring state owned enterprises(SOEs), privatization and reforming its revenue laws. 

"A return to fiscal consolidation, targeting a reduction in the overall fiscal deficit to 3.5 percent of Gross Domestic Product(GDP) by 2020, is the linchpin of the reform programme", and "Rebuilding tax revenues through a comprehensive reform of both tax policy and administration will be key in this regard, supplemented by steps toward more effective control over expenditures and putting state enterprise operations on a more commercial footing", the IMF June 2016 press release said. 

The conditionalities imposed on Sri Lanka largely resembled those imposed on Greece and Spain by the Troika, which include IMF, Europen Commission and European Central Bank, under the European Stability Mechanism(ESM). 

The third review reveals that the government's economic reforms have placed fiscal consolidation, revenue mobilization, monetary policy management and reserves accumulation broadly on track. The government's 2016 VAT law amendments increased VAT rates and narrowed exemptions. The lender insists on implementation of the program’s landmark reform, the new Inland Revenue Act,  which was legislated in October 2017, by  April 2018.  "Consistent with the objectives of the EFF-supported program, the authorities announced a new far reaching economic plan titled Vision 2025 in September 2017," the review says.

Government passed the Budget 2018 in last December strictly in line with these demands of

IMF, which the report stated targeted a primary surplus of 1 percent of GDP and fiscal consolidation towards the objective of reducing the overall fiscal deficit to 3.5 percent of GDP by 2020. "Vision 2025: A Country Enriched" is the government's austerity programme aimed at achieving these demands during the next eight years.
Early this month, presenting the Road Map for 2018, the monetary and financial sector policies for 2018 and beyond, Central Bank Governor,  Indrajit Coomarsawamy, exposed government's devout adherence to IMF demands. He stated, "the government is also committed to a revenue based fiscal consolidation programme, which intends to bring down budget deficits and debt levels progressively."

The island is deep-trodden in an escalating debt crisis. The total debt repayment for the next three years would be 7,000 billion rupees ($45 billion). Fiscal consolidation requires government to reduce the budget deficit to 4.5 percent in 2018, which stood at 5.4 percent last year.  The government is bound to honour IMF's neoliberal policies in order to meet these debt repayment goals and reduce budget deficit. 

The review was released while the government and the Central Bank desperately claimed of reaching economic stability by the end of 2017, in view of the Local Government elections in next month. In his new year message to the people at the dawn of the year,  Wickremasinghe said "amidst great challenges, we were able to steer forward in restoring economic stability and a process of sustainable development."

In his speech presenting the Road Map, Coomarsawamy echoed Wickremasinghe and stated,  "macroeconomic stability is being restored and our economy is trending in the right direction," which he had said, in end of December, has won the investor confidence. 

Yet, even the official indicators do not hide the gloomy picture. Country's GDP growth stood just at 3.3 percent in the third quarter of 2017. In spite of country's exports expanding by 8.2 percent in the first nine months of year 2017, imports increased by 9.7 percent expanding the trade deficit to US$ 6.8 billion, an increase of US$ 0.7 billion from year 2016. Foreign reserves of a meagre US$ 7.3 billion comprises mainly of borrowed monies and bond sales. The government will incur large amortization payments in 2018, and  will be burdened with repayments on its international sovereign bonds starting in 2019. Gross financing needs (amortization payments plus overall deficit) are projected to reach 20 percent of GDP in 2018, IMF staff report details.

In spite of government's claims of stability, the review states, "Sri Lanka remains vulnerable to shocks given its high level of public debt, large financing needs, and weak external position." Therefore, the lender recommends that, "fiscal consolidation should continue, supported by effective tax administration and spending controls." In respect of monetary policy, it advocates the central bank maintain "a tightening bias to contain inflation and credit growth pressures, while continuing to accumulate reserves accompanied by greater exchange rate flexibility." Reforms in SOEs, "especially in the areas of energy pricing and airline restructuring, should proceed without further delay".

In fact,  the  claims of so called "stability" is nothing about any gains for the working people and the poor, but an indication of the ruling establishment's sighs of relief in implementing  austerity measures at the expense of the working class and the poor, and satisfying the demands of foreign investment and of IMF to receive balance bailout funds. 

The Institute of Policy Studies, a think-tank based in Colombo, consoled the ruling elite and top businesses in its September last year report stating, "with the gains made in fiscal consolidation so far under the IMF's watchful eye, achieving and retaining macroeconomic stability appears more probable."

What the working class and the poor in turn have got is welfare cuts, increased taxes and consumer price hikes, unemployment, reduction of wages, privatization,  state repression of militant strikes against these measures and subjection to police state apparatus. 

Inflation in the country stood at 7.1 percent in December while food inflation rose to 14.4 percent. Youth unemployment stands at 18.30 percent.

In October last year, the government deployed  police and brutally attacked workers who protested against the long term lease of down South, Hambantota Port to a Chinese company. 435 workers lost jobs subsequent to the deal. President Sirisena declared fuel distribution an essential service in July last year and declared same on railways in December to counter and force break worker strikes. Last week, the government used police anti-riot squad and attacked protesting Electricity Board workers.  This is how the Wickremasinghe-Sirisena government met the "great challenges".