Image credits: Chamila Karunarathne
Sri Lanka is experiencing the worst economic crisis since its independence in 1948. Residents are struggling to keep up with the bloated food and oil prices as the central bank reports a record-high 66.7% inflation rate. Waiting in day-long queues by the gas stations and skipping meals have become common practices. Indrajit Coomaraswamy, a former Sri Lanka Central Bank governor, told The Wire in a heart-crushing interview that “The data seems to suggest that by the end of the year, half the population could slip below the new poverty line”.
The crisis began after a wave of unsustainable tax reforms were introduced in 2019 by the now-ousted President Gotabaya Rajapaksa. His decrease in value-added tax (VAT) from 15% to 8%, followed by a series of seven other tax cuts was poorly timed and injudicious. Sri Lanka lost over a million taxpayers to Rajapaksa’s politically enticed reforms by the end of 2021.
The new Prime Minister Ranil Wickremesinghe has declared that the country is “bankrupt”. This manifests itself as Sri Lanka defaults on its foreign debt of $51bn – the first Asian country to do so in decades. The default on the debt is largely attributed to the depleted foreign reserves caused by the pandemic-driven slack in the otherwise bustling tourism industry.
The International Monetary Fund (IMF), commonly known for providing loans to countries experiencing economic distress, has announced a $2.9bn bailout for the beleaguered country. However, this promise is contingent on Sri Lanka’s ability to negotiate debt restructuring and relief with its main creditors: the US and Europe, Japan, India, and China to name a few.
The IMF has also devised an ambitious 48-month programme to steer Sri Lanka on the path of economic and political stability. It sets a new direction for Wickremesinghe to follow. The long-awaited policies like strengthening the anti-corruption legal framework and improving fiscal transparency comprise the programme’s core. In addition to this, the rebuilding of foreign reserves through market-determined exchange rates is encouraged.
Although the IMF agreement adopts progressive measures to ensure recovery in the medium to long term, it does little for the short-term ramifications of the crisis. Food insecurity has made the lives of many poor and lower-middle class workers like auto-rickshaw drivers, and mothers juggling four jobs to feed their children a living nightmare. “You have to think twice,” says a market vendor to Al Jazeera as he laments over the 82% food inflation. 30% of the 22 million population are food insecure, which is horrifying, to say the least.
The IMF’s social safety net program that aims to protect the poor and vulnerable is unlikely to take place in the foreseeable future. The program requires a large sum of money which can only be secured through short-term financing. IMF Senior Economist Masahiro Nozaki claims that the $2.9bn agreement will have a “catalytic effect” of attracting funding as it acts as a testimony of Sri Lanka’s potential to bounce back. But the mere fact that IMF’s fund is contingent on financial assurances creates uncertainty.
Moreover, the IMF does not seem to have a timeframe for the $2.9bn reimbursement in mind. When asked about the same, IMF Senior Mission Chief for Sri Lanka, Peter Breuer responds: “We have in the past seen some cases that have taken a long time and that is not for the betterment of the country. It is also not in the interest of creditors”.
To make matters worse, the economic crisis is slowly turning into a health crisis. Sri Lanka imports more than 80% of its medical supplies. But without foreign reserves, the nation is facing shortages on all fronts, from cancer drugs to equipment for childbirth. “Ultimately, people are definitely going to die,” said an anonymous doctor in Colombo to The Guardian. Despite this, the IMF programme displays no direct consideration for the health crisis. Nor does it recognise the urgency by which Sri Lanka must act for the safety of its people. In addition to this, the authority’s sluggish response to the pleas of thousands of doctors for medical supplies is apprehensive. With no action taken, a fall in productivity seems inevitable for a medicine-deprived country.
Nevertheless, for the people of Sri Lanka, the involvement of the IMF comes as a beacon of hope. The authorities are open to change and have already implemented economic policies aligned with the IMF macroeconomic framework. Many recognise that this is only the beginning of a long painful recovery. As citizens continue ploughing through their daily lives, their fates are determined by the financial assurances of foreign creditors.
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