In Sri Lanka, a long and rocky road to economic recovery Premium

The International Monetary Fund has approved a $3 billion package for Sri Lanka. When the government implements the conditions stipulated by the Fund, it is Sri Lanka’s poor who will bear the brunt.

For Sri Lanka’s ruling establishment and its backers, March 20 was a good news day. The International Monetary Fund (IMF) finally responded to the government’s distress call following the collapse of the debt-ridden economy last year, by approving a $3 billion loan aimed at restoring economic stability and growth. “Sri Lanka will no longer be deemed bankrupt,” President Ranil Wickremesinghe said during a special address to Parliament, projecting the deal, which he desperately coveted, as a crucial economic milestone. “We have the opportunity to uplift our motherland again.” Sri Lanka would “regain recognition” in the international arena, its banks’ letters of credit would be respected by international financial institutions, it would now be able to borrow low-interest loans from other international financial institutions, foreign investors’ confidence in the country would be restored, new opportunities would emerge, and the foundation to build a strong new economy will be laid, he said optimistically.

Wickremesinghe’s supporters rejoiced; some burst firecrackers. For them, it was not just a breakthrough in economic recovery, but also the political redemption of an accidental president. The United National Party (UNP) helmed by Wickremesinghe was virtually wiped out of Parliament in the last general election in 2020. His ascent to presidency was made possible only with support from the party of Sri Lanka’s disgraced former ruling clan, the Rajapaksas, who were dramatically ousted in a citizens’ uprising last year. While the diminished UNP is now represented in Parliament in a lone seat, Wickremesinghe loyalists see his credentials as a crafty, resolute, veteran politician restored in three other letters: IMF.

The IMF deal for Sri Lanka — its 17th since 1965 — entails a $3 billion loan over four years based on several conditions, including arresting corruption. An IMF governance diagnostic mission has started to assess Sri Lanka’s governance and anti-corruption framework in the agency’s first such exercise in Asia. The government hopes to tap more rapid credit, including from other multilateral agencies such as the World Bank and the Asian Development Bank. A year after defaulting on its sovereign debt, Sri Lanka is looking to borrow more to stabilise its economy.

Sri Lanka’s political parties and civil society organisations are mostly united in the conviction that an IMF programme is the “only way out” of the crisis despite the agency coming under growing global scrutiny for the painful aftermath of its programmes in indebted countries. Evidence from the developing world shows that an IMF loan is no “bailout.” Its “structural adjustment” programmes rarely see countries decisively exit debt traps. In fact, critics accuse the IMF of facilitating more external borrowing in already heavily indebted countries. Economists and foreign debt experts around the world have also been urging the IMF to suspend the use of surcharges, in addition to potentially high-interest rates, arguing that these punish developing countries, aggravate their financial vulnerabilities, and act as sanctions on a country for being poor.

In Sri Lanka’s case, the IMF officially stepped in as an arbiter of economic affairs in September 2022 when it reached a staff-level agreement with the government. Anticipating an IMF package, the government took a slew of measures, including a pre-emptive default on its $51 billion foreign debt, a sharp hike in banking interest rates, a decision to float the Sri Lankan rupee (it depreciated from around 200 to 360 against the U.S. dollar), revise taxation, and increase fuel prices and electricity tariffs.

But Sri Lankans did not have to wait for the austerity measures to fully kick in to experience the effects. They had been facing acute shortages of essentials, long power cuts, and staggering food inflation of over 90% for months in 2022. The year saw the Sri Lankan economy contract about 8%, and crash. Coming on the heels of job losses and a drastic fall in real incomes during the pandemic, the economic crisis pushed poor citizens into existential agony. Depending on supplies available, families carefully chose what to eat, and how much. Many others who could not afford the food items had to consider which meal to forego or, worse, which child to feed.

Regardless of the government’s cheer over securing the IMF programme, almost everybody in Sri Lanka admits that it will be a painful year. But there is considerably less acknowledgement that some citizens may feel the pain much more than others. While poverty is hard to miss, inequality is convenient to ignore.