By Shihar Aneez

COLOMBO – Sri Lanka’s Central Bank Governor Nandalal Weerasinghe warned the public on Tuesdays that the country could go back to the 2022 crisis if any future government changes the current International Monetary Fund (IMF) subscribed economic policies and reforms.

Weerasinghe said there was hardly any space for economic policy manoeuvring under the current situation, but there could be a few adjustments without changing the overall goals, which President Ranil Wickremesinghe government had agreed with the IMF.

Sri Lanka is on a recovery path after it entered into an IMF deal with some difficult reforms including higher taxes, a steep cut in expenditure on government institutions, drastic reforms in state-owned enterprises, and a stable inflation-targeted monetary policy.

“We need to continue the same process going forward and if there is a deviation, it would be a challenge. That’s the important message we want to give,” Weerasinghe told reporters at a media briefing in Colombo.

“This is to make the public aware because the public are the final decision makers. People should be aware that if we deviate from the current economic policies, there is a risk we may go back to a situation like the previous crisis,” he said when asked if he was warning a new government after a possible election later this year.

Weerasinghe was referring to the 2022 economic crisis that saw shortages of essential items especially fuel and day-long queues outside petrol stations.

“It is not an issue with under which government,” he said, elaborating that it was about the importance of continuing the same economic policies going forward. “What we have done is, we have informed the public that the economy might go back to the situation like the past crisis if we don’t go with the current policies,” he added.

Under the ongoing IMF program, Sri Lanka has seen a degree of economic stability. The rupee has appreciated, inflation has fallen to below mid-single digit from a record 70%, tax revenue has risen, loss-making state-owned enterprises have reversed high losses, market interest rates have reduced to a third from over 30%, and the economy has posted quarterly growth after contractions in six quarters.

The country’s primary balance also has posted a surplus in 2023.

Opposition parties including the centre-right Samagi Jana Balawegaya (SJB) and Marxists Janatha Vimukthi Peremuna-led National People’s Power (NPP) have said they will revise some IMF conditions, as some of the policies including higher taxes have inconvenienced the public.

Weerasinghe said the IMF deal has seen some continuous changes since the global lender’s staff-level agreement was released in September 2022.

“Changes are not in terms of the directions of the fiscal consolidation.  The need is for revenue enhancement, for curtailing expenditures, for maintaining stable expenditure, to build up reserves, and to maintain financial stability,” he said.

Weerasinghe’s comments come as the island nation heads for a constitutionally mandated presidential election between September 18 and October 18 this year.

Political uncertainty has been on the rise with opposition parties SJB and NPP claiming to be in the lead in some informal polls, but no opinion polls have been done to find the leading candidate.

President Wickremesinghe’s allies have said the current IMF-led reform agenda could be derailed if the deal with the global lender is revised.

“Those can’t be changed under any administration in future,” Weerasinghe said referring to the key IMF goals.

“But within that how we are going to achieve those objectives for example revenue enhancement or primary surplus achievement, there could be different means and ways to achieve the same target that’s up for every review,” he said, noting that if one looks at the first, second and third reviews, there have been changes in every document. “Likewise, it is a continuous review process once every six months depending on the situation, depending on what we see as the best policies,” he added.

Weerasinghe also said that any government, Ministry of Finance or the Central Bank can negotiate and agree to a different set of terms and conditions in the short term. But overall, the key one is to restore debt sustainability in the medium to long term and ensure the economy is growing at a reasonable pace, there is fiscal sustainability, monetary sustainability, and financial stability. “Those are the key issues.”

He said in addition to the key targets there are other reforms like curbing corruption and increasing social safety nets that need to be fulfilled.

Noting that there have been reviews all the time, he said irrespective of whether the IMF agreement is fixed or not for the next 10 years, 4 years or even 1 year, there are changes every six months, and those kinds of changes can happen subject to overall path and direction remains unchanged.

Weerasinghe also said the country could face external challenges possibly from petroleum price hikes, global uncertainty, and geopolitical issues.

“Those can come from the external sector, outside the country. Those also could be challenges. One can be global monetary policy. If there is a different expectation, there could be market instabilities and capital flow movements,” he elaborated but added that basically what he sees as the challenge is to continue the same policies going forward irrespective of administrations.  “That’s the key challenge.”

-economynext.com