Politics of Sri Lanka’s IMF bailout: an initial assessment
By Dr. S. I. Keethaponcalan
Sri Lanka’s long-awaited International Monetary Fund (IMF) bailout finally came through. On March 20, 2023, the IMF approved three billion US dollars under its Extended Fund Facility (EFF). It is claimed that Sri Lanka could access up to seven billion US dollars.
An immediate disbursement of 300 million US dollars was made immediately after the approval. Sri Lanka has a long history of borrowing from the IMF. However, this time around, it was different because the current bailout is aimed at preventing a total collapse and a socio-economic catastrophe. Sri Lanka also did not have too many other options.
Nevertheless, there was doubt at one point in time whether the IMF would bail out Sri Lanka, with even government ministers casting doubts. Some predicted there would be no IMF assistance because of the Chinese resistance to necessary concessions. However, for some of us, it was clear that a rescue package would become a reality.
One, the international community, especially the regional bigwigs, could not allow Sri Lanka to collapse because a Sri Lankan disaster would have an unavoidable spill-over effect on other South Asian states. Therefore, someone needed to bail Sri Lanka out. The IMF was one of the promising candidates.
Two, failure to rescue Sri Lanka would have pushed the country more into the control of China. When the Sri Lankan crisis emerged, President Gotabaya Rajapaksa’s government, especially Central Bank Governor Nivad Cabral, who played a significant role in ruining the country’s economy, preferred to work with China than the IMF. He announced that “Sri Lanka does not need IMF relief.” Before the crisis, China consolidated its power and influence in Sri Lanka, which concerned India and the United States. The crisis imparted an opportunity to re-establish their influence in Sri Lanka. This was precisely why India and the USA contributed considerably to the final IMF decision.
Three, although China was initially hesitant to make concessions, it did not have the luxury to not cooperate with the IMF and Sri Lanka on this issue. Sri Lanka used to be in the sphere of influence of the West and India. In the early days, China struggled to establish a foothold in Sri Lanka despite the historic connection between the two countries. The end of the civil war in 2009 enabled Sri Lanka to sideline India and the US and forge close relations with China. Hence, post-civil war witnessed a rapidly growing Chinese presence and influence in Sri Lanka. Meanwhile, the notion that it was the Chinese hesitance to make concessions, for example, to restructure debt, compromised its image and position in Sri Lanka. China cannot easily lose Sri Lanka because it has already invested considerably in the Sri Lanka project. Eventually, Chinese banks made adequate concessions that sealed the IMF approval on March 20. As The Business Times reported on March 7, 2023, “Chine has given assurances that it will support Sri Lanka’s debt restructuring, potentially clearing the biggest hurdle for the South Asian nation to secure a US$2.9 billion bailout from the International Monetary Fund (IMF) in the coming weeks.”
The approval on March 20 generated mixed reactions in Sri Lanka. The government of Ranil Wickremesinghe was elated. On March 21, the president proudly announced, “we will no longer be declared a bankrupt nation, but a nation that can restructure its debts.” Government supporters celebrated the news with fireworks. On the other hand, sceptics mocked the government, saying this was not the first IMF loan to Sri Lanka. The implication was that the IMF deal should not be treated as an achievement or victory. Others pointed out that the deal would only benefit the government and wealthy groups. They believe that ordinary Sri Lankans would not benefit from the bailout package.
The argument that the IMF bailout would not benefit ordinary people is ill-informed and politically motivated. In other words, the bailout can benefit ordinary people immediately. Sri Lankans have been experiencing immense hardship daily from the skyrocketing cost of living. One source of the killer price of essential commodities was the depreciation of the Sri Lanka rupee again the dollar. The Sri Lanka rupee almost wholly collapsed following the economic crisis. As an import-dependent society, the impact of the dollar crisis and resulting high prices crippled the lives of ordinary Sri Lankans.
The bailout has the potential to strengthen Sri Lanka rupees against the dollar. The impact has already been felt. On March 20, a dollar was worth 345 rupees. On March 21, one day after the IMF decision, the dollar depreciated to 323 rupees. According to informed sources, the dollar could stabilize at 300 rupees. This would significantly improve the buying power of people. As a result, the burden of ordinary Sri Lankans could ease to a certain degree.
Another issue that greatly affected ordinary people was the import ban of many essential commodities that stemmed from the economic crisis. For example, lack of medicines had severe social repercussions. Predictably, the government has announced that the import ban will be gradually lifted. The import ban on drugs will be lifted in the first round, a commendable move.
Therefore, it is safe to argue that the IMF bailout would ease the pressure on average Sri Lankans. Politically, a notable fact is that President Wickremesinghe’s political plans depend on the immediate impact of the bailout dollars. For example, local government elections were scheduled for March 2023. However, the election has been postponed indefinitely due to a lack of funds from the government. Wickremesinghe maintains that the state does not have adequate resources for the local government elections, which could be partially true.
Nevertheless, theoretically, it is possible that the Wickremesinghe government intentionally sabotaged the election. Given the social condition in March 2023, the election results could have been fatal for Wickremesinghe’s political plans. Due to the IMF deal, he has been seen by a section of the Sri Lankan polity as a champion and a saviour. He may be planning on capitalizing on the improvements gained through the bailout resources and opting for the presidential election first. Sri Lanka should conduct a fresh presidential election before the end of 2024.
Nevertheless, exploiting the positive impacts of the bailout package and winning an election will not be an uncomplicated scheme. The bailout package is a bitter medicine. As usual, the IMF package entails several conditionalities. Domestic economic reform is an integral part of the IMF conditions. In Sri Lanka, economic reforms mainly mean the privatization of state-owned enterprises. Recently, President Wickremesinghe casually declared that the state should not be in the business of doing business. The statement reflects his current thinking.
Therefore, the government will fully or partially privatize several state-owned businesses in the near future. Sri Lanka Insurance and SriLankan Airlines will be some significant sectors targeted for privatization. A section of Sri Lanka’s political elite and populace is anti-privatization. Education and health sectors could also be targeted, making the socialist groups nervous and agitated. In addition, the possible downsizing of the military will energize Sinhala-Buddhist nationalists against the government. While approving the package, the IMF maintained that Sri Lanka should stick to its tax reform program, meaning the recent tax hikes should continue. Moreover, the IMF demanded that the energy subsidy schemes be discontinued. All these actions will be highly unpopular.
Different groups have already been protesting many of the IMF-influenced decisions and actions. For example, high-paying public sector employees have been protesting the recent tax decisions and want them removed. These protests could intensify.
Some political parties, especially socialist groups, including the Janatha Vimukthi Peramuna (JVP), are unhappy about the IMF deal. One, they are inherently against Western structures, including the Bretton Woods Institutions. Two, the possible improvement of social conditions due to the bailout package would hurt their political support base. For example, the JVP, which only has about four per cent national vote, believed it could win national elections after the economic crisis. The bailout package is not good news for them. Hence, the anti-Ranil Wickremesinghe political parties, including the JVP, the Sri Lanka Podujana Peramuna, and the Samagi Jana Balawegaya of Sajith Premadasa would use problematic aspects of the bailout package as a political weapon against Wickremesinghe in the presidential election. One has to wait and see how the masses would react. It is too early to predict the political outcome of the IMF bailout package for Sri Lanka.
-Dr. S. I. Keethaponcalan is a Professor of Conflict Resolution at Salisbury University, Maryland. Formerly, he was a Professor of Political Science at the University of Colombo, Sri Lanka
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