Sri Lanka has been in the grip of an acute economic crisis currently, and the incumbent Government, sadly, sans any assistance from Opposition political parties, is struggling to carry on and prevent a complete crash. Inadequate external buffers and an unsustainable public debt dynamic have increased vulnerabilities substantially.
Sri Lanka defaulted on its external commitments because of the debt embargo in April, and a dangerously low level of foreign reserves has delayed imports of crucial essentials, further hindering economic activity.
According to the Central Bank data, expatriate remittances totaled $437.5 million in the first month of 2023 compared to $259.2 million in January last year, revealing a considerable improvement. Amid customary misinformation by some political parties that has visibly attempted to disrupt, the inflow of expat remittances is showing a slow but steady growth for the past few months, particularly after the introduction of the floating exchange rate regime.
As a result of poor policy decisions made in 2021, expatriates turned to informal channels such as “undiyal” and “hawala” methods to obtain a higher rate for their foreign currency. However, the remittances still remain less than required, as remitters who became familiar with informal methods have not completely switched back to the banking system. During the past several years, expatriate remittances have remained the largest source of foreign revenue, with the highest of just over US$ 7 billion in 2018.
Concerns
According to Export Development Board reports, a decline in some major merchandise exports, such as apparel and rubber- and coconut-based products, was observed, raising the concerns of authorities. The key reason for the decline is attributed to the ongoing depressed global demand as well as new challenges faced by local manufacturers. However, the industry experts believe that the situation will improve and Sri Lanka’s export performance will revert to its previous level in due course.
Meanwhile, the third highest foreign revenue source, the travel and tourism industry, is making substantial progress with a creditable influx of tourists from across the globe. The country received over 700,000 tourists in 2022, despite the ongoing economic and political situation. As of today, the industry shows steady growth.
The prediction of the Tourism Development Authority is that Sri Lanka is expecting 1.55 million tourists in 2023 with an ambitious revenue target of US$ 5 billion by attracting high-spending segments. Unless a drastic disruption occurs, the figure anticipated is seemingly achievable considering the current trend, according to industry experts. The best arrivals recorded in 2018—2.3 million—can be reached in 2024 or even beyond if everyone supports sustaining the ongoing movement, as veterans in the industry positively project.
The long-awaited IMF assistance has now reached its final stage. According to the President’s media division, Sri Lanka has officially received IMF Executive Board approval for the Extended Fund Facility (EFF) and is awaiting implementation at the time of writing this article. Although the news is not a reason to make a song and dance for political gains, this is a lifesaving move for the country and provides breathing space.
Argument
Although the subject matter was argued for and against by scholars, economists, and experts the facility seemed extremely valuable for the country for multiple reasons. One argument was whether the EFF that will be awarded for US$ 2.9 billion in eight installments is sufficient enough to pull the country out of the deep pit it is currently in.
However, the other faction, particularly pro-Government and unbiased observers, say that with the IMF’s acceptance, the current image of the country, which is at the lowest level on external debt payments, will improve considerably, allowing international lenders to provide financial assistance.
Also, although the government’s media machinery has not been active enough to educate the masses, the general opinion of society is that most of the conditions laid down by the IMF are justifiable. For example, conditions such as reducing corruption, improving fiscal transparency and public finance management, introducing a strong anti-corruption legal framework, and conducting governance diagnostics are exceedingly positive moves for the country.
In fact, these are the foremost requests of almost the entire citizenry, perhaps except a few politicians. The Sri Lankan society has been demanding such moves from successive governments. The recent mass protests also predominantly made such demands during their campaigns. It is no secret that almost all the above-mentioned factors, created by corrupt politicians and dishonest senior public servants, have been the major causes of the current gruesome situation.
The politically motivated corruption of all levels of politicians and their immoral and dishonest henchmen in the public service created a huge disruption to the general economy during the past forty-plus years. The public opinion is that the vast majority of politicians active in politics fall into this category. It is common knowledge that monetary transparency and public finance management have not been adequately monitored by authorities, allowing corrupt elements to thrive through despicable activities.
The IMF’s advice on raising the fiscal revenue to support fiscal consolidation is mandatory at this point, according to neutral economists. Tax revenue is the primary source of funding for many Government programs and services, such as education, healthcare, infrastructure, and national defense. Without sufficient tax revenue, the Government may struggle to provide these essential services to citizens. It also encourages and promotes social security by redistributing income from wealthier individuals to less affluent people.
Despite the vehement opposition by professionals, the tax reforms recommended by the IMF and implemented by the Government have their pros and cons. For example, the taxation tiers are seemingly too high.
Justifiable
Hence, the Government should attempt to arrive at a consensus with professional trade unions that keep announcing that they are not after the pound of flesh and are ready to compromise. If the Government has justifiable reasons to hold on to the current rates, they must offer acceptable explanations.
Introducing a cost-recovery based pricing for fuel and electricity is another request made by the IMF according to media. Although such a move may aggravate negative public opinion, cost-recovery based pricing is an important pricing strategy for essential commodities because it ensures that the costs of producing and distributing these commodities are covered by the revenues generated from their sale. Overall, cost-recovery-based pricing is an important tool for ensuring the sustainability, efficiency, and equitable distribution of essential commodities.
Simply put, for an unbelievably long period, consecutive governments have been subsidising low-cost pricing predominantly for electricity, fuel, and water supply, creating an enormous debt pile. The debts were repaid through obtaining loans from foreign sources. Almost all previous governments were comfortable with concealing this salient factor from the public for political gains.
Regrettably, even the workers attached to these institutions, who resort to trade union actions for any minute issue, knowingly disregarded the consequences and kept demanding exorbitant perks such as enormous amounts of overtime payments, annual bonuses, loans, and regular pay hikes. The IMF’s involvement brought these irregularities to light, and the Government was forced to increase the prices.
The IMF funds are not at all sufficient for the recovery of the economy. The external reserves must be strengthened further through exports, expat remittances, and tourism. In addition, restructuring of external debts and further support from other international lenders can also be intensified with the IMF’s confidence in Sri Lanka.
However, the most crucial issue is the ongoing political rivalry on both important and unimportant matters that affects tourism and possible foreign investments. As the recent Fitch prediction indicates, the current positive external finance situation may be hampered by the political upheavals that may lead to a depreciation of the Sri Lankan rupee. Hence, while the Government needs to compromise on some of the stringent measures, the Opposition parties must agree to a consensus if they are genuinely interested in bringing the country to prosperity.