Editorial

A staff-level team from the International Monetary Fund (IMF) is scheduled to arrive next week to sign a reform programme as the country entertains mixed feelings in going, belatedly as it is, for a bailout from the lending agency. Why mixed feelings – because on the one side there seems to be no other option to come out of the hole the economy is in and further borrowed money is immediately needed for sheer survival; on the other, IMF programmes come with conditions, economic pills that are bitter and hard to swallow.

A report from the Finance Ministry readied for the upcoming negotiations says the Government is currently in active negotiations over “a realistic macroeconomic and fiscal framework with the IMF. This should lead to a staff-level agreement in the coming weeks that will unlock the necessary financing to address the liquidity needs the country is currently facing” (please see details on Page 1).

Several steps need to be taken even after the staff-level agreement is reached. To reach IMF Board-level it is mainly the success of the engagement with foreign creditors in order to obtain financial assurances that will determine the outcome. It is still a long, painful road ahead. President Ranil Wickremesinghe told the Organisation of Professional Associations (OPA) this week, “We have no choices in the solutions” (see extracts of his speech on Page 18).

Sri Lanka has lost its bargaining power. It is relatively a new case study for the IMF itself. They are not dealing with the usual case of an overheated economy, they are dealing with a bankrupt nation. Fortunately, however, the IMF has learnt to take a somewhat softer more sensitive approach to the social disorder that usually follows from its prescribed medicines.

The team will surely come up with a fundamental outstanding issue to discuss debt restructuring options. Whether the team will do so without touching domestic debt remains to be seen. The Central Bank Governor is confident that domestic borrowing which is in the region of Rs. 12 trillion is not on the table. If it is, monies in the EPF and ETF accounts invested with Development Bonds etc, are in for a hit. Domestic borrowings have already received an upfront hit via a 60 percent inflation rate and there seems to be a difference of opinion at the highest levels if domestic debt restructuring must go hand in hand with external debt restructuring.

Sri Lanka failed to manage the transition from a low-income country dependent on foreign aid to bridge its budgets and foreign exchange deficits. As a middle-income country, it went on a borrowing binge since 2009 in international capital markets through ISBs (International Sovereign Bonds) and international banks, spending that money on low-return high-corruption infrastructure projects. In Government-to-Government bilateral borrowings, China leads the pack with 44 percent of Sri Lanka’s total G-to-G borrowings.

The President explained, as he must, what lies ahead. Previous leaders played matters so close to their chest that it was only when the deck of cards collapsed that the people realised what had gone on. He said Sri Lanka has to deal with two groups: The West and the Chinese. The West wants ‘haircuts’ (taking tough decisions on reforms and debt restructuring) while the Chinese are willing to provide further loans to ride the crisis, but pass on the headaches of repaying to future generations.

The IMF is clearly on the West’s approach for Sri Lanka’s economic recovery. What the West, as the main contributors to the IMF mean by a ‘haircut’ is, inter-alia, to ensure the huge loss-making SOEs (State Owned Enterprises) see they get from the red (losses) to the black (profits) in the bottom line of the Government balance sheet.

It is a positive sign to see the three spokesmen for the main Opposition party in sync with Government planners on restructuring these institutions, at least in principle, the three biggest loss-making SOE culprits being SriLankan Airline, Petroleum (CPC) and the Electricity Board (CEB).

The fact that the main Opposition party is an offshoot of the neo-liberal President’s party might help the President get that support for market reforms, but even others more inclined towards the State (however inefficient) controlling the commanding heights of the economy can see the writing is on the wall. It is time for these ‘haircuts’.

Today’s economic realities must surely be a wake-up call for those outdated political ideologies long abandoned even by their authors and even Communist Cuba – yes, even Cuba, is now going in for private-public partnerships.

This would not mean that the path to recovery must ride roughshod over the more vulnerable segments of society. That only means ‘operation successful; patient dead’. The President acknowledges the 1978 liberalised economy which his party introduced breaking the shackles of a then stagnant socialist economy needs to change to a social market economy, a halfway house between capitalism and socialism. Sri Lanka, after all, is a Democratic Socialist Republic.

Theorists may argue about political nomenclatures but the ordinary man and woman on the street in queue after queue will be thoroughly unimpressed by these labels which political leaders, especially of the radical Left, can dispute later. For the masses what matters is that their basic needs are affordably met.

Currently, neighbouring India is also having a long debate on what amounts to subsidies or handouts (or freebies) in mega welfarism at the expense of the national purse. One citizen’s freebie is another’s essential. ‘Safety nets’ for the poor are not freebies, but essentials; even building toilets is not a freebie. And India’s SOEs are considered the biggest freebies to the public – just like in Sri Lanka.

Health, Education, Agriculture (fertiliser subsidy) and Infrastructure (connectivity) are considered essentials. The problem in Sri Lanka is the rank corruption that took place at least in the latter. Sri Lanka should have a National Food Security Act like in India. It covers less affluent citizens in both rural and urban areas, a bit like the ‘Samurdhi’, but largely corruption-free, doling out food grain and helping eliminate hunger and malnutrition in a population of over a billion.

These then are legitimate freebies even the IMF cannot ignore as it presses Sri Lanka to brace itself to take that ‘haircut’.