PAKISTAN READER

Dhivya KM Dhivya KM is an intern at NIAS and is also a postgraduate student from the Department of Financial Economics, Madras School of Economics, Chennai.

In the last six decades, Sri Lanka has sought assistance from the IMF no less than 17 times more than any other country in South Asia. Its most serious economic crisis occurred in 2022, leading to shortages of goods in store, gas shortages at the fuel stations, and large numbers of people on the streets, resulting in a 3 billion USD deal with the IMF in 2023. Three years later, the economy is stabilized, debt talks have started making a way, and there is a budget surplus but the debt burden is huge, and the cost of adjustment is heavy.

The following are four key takeaways from the IMF-Sri Lanka relationship. 

1. Macroeconomic stabilization without robust social safety nets risks increasing inequality and public discontent
As part of the 2023 loan program, Sri Lanka pledged to increase taxes, revoke all exemptions, and make household citizens pay for their actual expenses of fuel and electricity instead of subsidizing it. The country also promised to implement fiscal regulations regarding the control over public finances and restrictions in the government’s printing of currency to finance government expenses. These conditions are economically rational, yet in the short term they increased the financial difficulties of struggling people in Sri Lanka. The cost of electricity went up. Taxes went up. Yet the welfare system that should have mitigated the impact failed to do so on time. IMF acknowledged the shortcoming in its review and called for more attention towards the development of social security nets. However, the fundamental problem is inherent which require a reduction in fiscal deficits. When a government faces pressure to bring down its fiscal deficit fast, social spending is often the first target. This is the core message of the criticism of such programs that have been raised all over the world.

2. The Aragalaya protests transformed Sri Lanka's political landscape; however, the debt crisis left the new government with little choice but to continue IMF-backed reforms
Frustration with IMF is not new in Sri Lanka, but it reached a breaking point in 2022. An anti-government protest movement called Aragalaya which means “struggle” in Sinhala forced a president out and highlighted decades of poor governance and the fiscal tightening policies. One aspect of this dissatisfaction was with the very same economic prescriptions that IMF programs usually involve. The leftist JVP political party and its political alliance, the NPP, had been claiming for years that IMF conditions were designed to help rich creditors and not common people. This political wave led to an electoral victory for them in 2024 when Anura Kumara Dissanayake became the President based on his promise of economic reforms and social justice. However, it soon became clear to the new government that there was no better way. Rejecting the IMF program could have led to the second crisis for the country. They continued with it. This is more an indication of the constraints of heavily indebted states than a political choice.

3. Sri Lanka's IMF programme has restored macroeconomic stabilization, but high debt levels and external risks continue to make the recovery fragile
In 2023, the IMF loan arrangement took place when Sri Lanka reached rock bottom. The country had no more foreign exchange reserves, where the country is unable to pay its debts, and was caught in political turmoil. Three years later there has been growth in the second half of 2023, the rates of inflation have been brought under control and decreased drastically compared to their peak in the period of the crisis, foreign exchange reserves are higher again, taxes have been collected better, and the budget balance of the government has moved to the positive side. However, while the IMF pointed to the success of the reforms, it highlighted that the recovery is fragile. Debt is still significantly higher than the GDP and talks about debt restructuring are still ongoing. One negative external factor can destabilise everything that has been done so far.

4. Sri Lanka's long-term economic stability depends on addressing structural weaknesses, successful debt restructuring, and continued political will
The 2023 programme goes beyond fiscal stabilisation. It also pushes Sri Lanka to address deeper structural weaknesses such as corruption, weak public institutions, and state-owned enterprises that have long been a drain on public finances. Sri Lanka committed to publishing a governance review, passing anti-corruption legislation, and cleaning up the balance sheets of state companies. These are the kinds of changes that take years to take hold, but without them, the risk of another crisis remains high. Debt restructuring working out new repayment terms with China, India, and private bondholders is equally central to the plan. Without it, the debt burden will continue to crowd out the spending that Sri Lanka needs to invest in its people and its economy. The IMF expects the debt load to remain elevated well into the late 2020s. Growth is slowly returning, but the road ahead is long, and whether Sri Lanka stays the course will depend as much on political will as on economic conditions.

 

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