ECONOMYNEXT — As Sri Lanka gears up for elections, policymakers must avoid rash economic promises that risk a
decade of lost growth and an era of relative decline, the Institute of Policy Studies (IPS) said, also cautioning against interruptions to the ongoing International Monetary Fund (IMF) programme.
As too often in the past, Sri Lanka appears not to have broken its damaging tendency towards ‘competitive populism’ ahead of elections, IPS said in a statement on Thursday September 19, two days ahead of Sri Lanka’s highly anticipated presidential election.
“Fiscally profligate promises ranging from wage increases to loan write-offs and welfare handouts are being made in a bid to win votes. Such pledges often come with a hefty price tag that the country can ill afford, especially given its still fragile economic recovery.
“The choices for Sri Lanka on the economic front are starkly clear: a) proceed along the agreed International Monetary Fund’s Extended Fund Facility (IMF-EFF) programme fiscal targets and timelines; b) rehash tax and spending at the margin without materially altering EFF targets and commitment; and c) discontinue the current EFF programme and renegotiate afresh. The choices made will determine what the enduring effects of the 2022 economic crisis will be,” the institute said.
IPS said that even the fact that such options are a matter of discussion points to an irrefutable fact: harsh austerity in the midst of a deep economic crisis hurts, and it hurts the neediest most.
“The austerity measures – tax increases, wage freezes, subsidy removals – implemented so far have helped rebuild fiscal buffers, restore monetary stability and revive economic growth. In the process, though, both policymakers and the public have been called on to make sacrifices. For the former, implementing unpopular economic measures is never easy. The latter, despite a decline in incomes and living standards, have been mostly resigned in the hope of seeing their economic conditions improve over time. Those improvements have partly materialised, albeit rather slowly. Those who fell into poverty have been offered welfare support, and jobs are being generated. But for those on low to middle incomes – the ‘squeezed middle’ – the cost-of-living crisis has left lasting damage.”
Elections can galvanise promises to speed up the recovery process via various policy solutions, IPS said, noting that, in normal times, these will not invite intense scrutiny. However, the institute said, these are not the typical ‘business-as-usual’ times for Sri Lanka.
“It is a country still tagged as ‘in default’ with very limited access to international finance, either for the government or the private sector. This very limited access hinges on the continuation of the IMF programme. Any extended interruption to the current EFF could result in the drying up of that scarce funding, and the only way to keep essential services running will be to print new rupees and make the currency nearly worthless as inflation spirals. This time around, therefore, Sri Lanka’s habit-forming past practice of ‘muddling through’ crises is no longer an option.
“Electoral policy agendas will inevitably focus on alleviating economic hardships, tackling distributional concerns, and boosting output growth. Sri Lanka’s current economic context, though, demands that these should not be addressed haphazardly. Shortcomings on tax and spending can be redesigned through targetted measures without damaging fiscal credibility. In turn, continued stability around the fiscal framework will help to focus policy more intently on deeper structural factors that impede durable growth. If managed well, Sri Lanka’s post-election path could usher in an era of self-sustaining economic recovery, driving rising living standards towards a more prosperous and fairer society.” (Colombo/Sep19/2024)