IMF deal and fallout will be central point of contention between elite and workers
IMF deal and fallout will be central point of contention between elite and workers
All eyes are on Sri Lanka as it suffers its worst economic crisis since independence. Millions of families struggle to put food on the table. Long lines of people queuing for fuel or gasoline are commonplace across the country. Doctors in Sri Lanka are running out of medicines for patients. Schools lack paper to organize exams. The vast majority of people are protesting with one goal, demanding that the Rajapaksa brothers, who are in power, go home.
The Rajapaksas must indeed bear the lion’s share of the blame. It is their authoritarian rule, their arrogance and their short-sighted politics that have aggravated the economic downturn. The government recently announced two major decisions – the first, not to repay its $51 billion foreign debt, thus tarnishing the country’s spotless balance sheet, and the second, to negotiate a support package with the International Monetary Fund ( IMF) while the country is “restructuring” its debt.
Political choices too
How did this situation come about? Sri Lanka is in crisis, not only because of the blunders of the Rajapaksa government, but also because policy choices over decades have left the economy with little strength and resilience to rebound. The Sri Lankan elite wanted the country to become a Singapore, but today the country is begging to put food on people’s plates. It is a national disgrace that must shake the establishment in power. And yet the country is once again opting for the same stereotypical remedies, showing no indication that it has learned any lessons from its disastrous trajectory of unrestricted imports and refinancing debt with more borrowing. In fact, the top economic brass in Colombo seem rather self-satisfied, for having pushed for debt default and restructuring through an IMF deal to which the government has now given its main answers.
Amid the great upheaval of protests to unseat the incumbent regime, anti-regime elites think above all of constitutional and legal solutions, with no serious economic alternative beyond an IMF package that could, at best, bring in some billions of dollars in the short term. But the real cost of such a set of “reforms” will be much higher and invariably borne by the working people.
While it is economic hardship that has brought the masses to the streets, the government’s forthcoming IMF-agreed measures only portend greater economic agony for the poor, as taxes rise and social spending for public goods and services are at risk. As seasoned technocrats take the reins to work with the IMF, it is not recognized that it is unbalanced development and gross inequalities in access to resources, income generation and wealth that have led to consequences dangerous policies for the country.
Default, debt restructuring
Sri Lanka’s strategy of defaulting on its foreign debt, scheduled less than a week before negotiations with the IMF in Washington, could not have happened without IMF approval. The default not only taints the country on the international lending scene, but also creates desperate dependence on the IMF, giving it full power to unilaterally determine lending terms. Indeed, the IMF is at the controls to direct the economy or, Sri Lanka will experience a murderous crash with bankruptcy.
There is no guarantee that an agreement with the IMF will even lead to financial stability, given Sri Lanka’s past engagement as well as the volatility of financial markets today. The logic of default and debt restructuring with austerity is bound to encounter many obstacles. Financial markets are far too erratic to accept so-called orderly defaults, and the coming weeks are likely to be tumultuous. Sri Lanka may find it difficult to carry out international financial transactions, including those for imports of essential goods. Certainly, the neoliberal dream of re-entering international capital markets to continue the commercial borrowing frenzy is a tall order, as default has made the country much less creditworthy.
The IMF staff report, which was released in March 2022, sets out a number of recommendations that could be incorporated into the next arrangement: revenue-based fiscal consolidation through higher tax rates and energy price reforms; restoring debt sustainability; short-term tightening of monetary policy towards inflation targeting; a flexible, market-determined exchange rate; and targeted social safety nets.
Significantly, many of these recommendations are already being implemented by Sri Lanka. The exchange rate has been floating, passing on higher import costs to consumers; interest rates have been doubled to 14%, jeopardizing small businesses and the livelihoods of rural producers, and increases in energy prices, for example gasoline and cooking gas, have been passed on to consumers.
The strictest of these future conditions are also mentioned in the IMF report, which calls for “growth-enhancing structural reforms, including increasing women’s participation in the labor market, reducing youth unemployment , trade liberalization, development of a comprehensive and coherent investment promotion strategy”. , and reforming price controls and public enterprises”. Forcing women into the workforce, further liberalizing trade, removing price controls and privatizing state-owned enterprises where public services become unaffordable will suffocate households and tear the social fabric.
Over its post-colonial history, Sri Lanka has gone through 16 IMF arrangements, the most recent being a $1.5 billion Extended Financing Facility in June 2016. Prior to that, it was a stand-by arrangement $2.6 billion two months after the end of the civil war in May 2009. These recent agreements were crucial for Sri Lanka to take out commercial loans; for example in July 2016, a month after the last IMF agreement, Sri Lanka borrowed US$1.5 billion in sovereign bonds; $500 million of this amount was just repaid in January of this year.
In this context, the reforms planned in the next agreement with the IMF will probably have much more impact and will perhaps be of the order of the structural adjustment program launched after 1977 with the IMF. The launch of these neoliberal policies, locally referred to as the “open economy” reforms, triggered policies that are in fact the long-standing underlying causes of the current crisis.
In Colombo’s elite circles, the refrain now is that “we will have to go through a lot of suffering before it gets better”. But the elite will be the last to suffer as the austerity will mainly hit workers in Sri Lanka. In fact, the IMF deal to bail out external lenders also bails out the elite classes in Sri Lanka, as much of the foreign debt and related projects and conspicuous consumption have served them better than anyone else.
The proposed solution is to be able to borrow more on the capital markets after the green light of the agreement with the IMF; but this, if achieved, will only increase the debt stock, making a future crisis inevitable. The other more controversial measure will be to sell the family money, in the form of the privatization of state enterprises and institutions built over decades to pay off foreign debt.
Start with a wealth tax
The idea that somehow Sri Lanka can get through this crisis in a short time, say a year, and that people who are already in dire straits can experience more economic suffering in the months to come risks backfiring. With the spotlight on growth and recovery, Sri Lanka’s worst fear right now is a likely food crisis, where starvation or even starvation are real possibilities.
Neoliberal technocrats propose to bribe those affected by austerity measures with cash transfers. However, working people are much more committed to their welfare rights, as evidenced by their fierce fight to protect free education and universal health care over the decades. Indeed, there will be enormous resistance to the privatization of public services and utilities. If anyone is going to pay for this crisis, it must obviously be the wealthier classes in the country; imposing a wealth tax, for example on property and vehicles accumulated over the years, would be a starting point.
The great democratic efforts of the people, both in the electoral field and through extra-constitutional means of protest, have ensured that repressive regimes and oligarchies have been systematically overthrown in Sri Lanka. It is the failures of the Sri Lankan elite for their narrow interests that have allowed polarizing and destructive regimes to emerge time and time again. The IMF deal, its conditionalities and its fallout, are going to be a central point of contention between the elite trying to maneuver this crisis and the workers who generated this political opening. It is these ideological and political struggles in the midst of this crisis that will determine whether Sri Lanka will choose bankruptcy or takeover.
Ahilan Kadirgamar is a political economist and senior lecturer, Jaffna University, Sri Lanka