What can Sri Lanka do if IMF leaves the negotiating table?

Professor Priyanga Dunusinghe at University of Colombo queries

By Sanath Nanayakkare

We cannot expect that IMF will always be there to support Sri Lanka if the country begins tinkering with the set of economic policies and reforms it needs to implement in exchange for financial assistance from the IMF, Priyanga Dunusinghe, a Professor in Economics in the Department of Economics at the University of Colombo said on 24th August 2024.

He said so in response to a question posed at him during ‘Paththaren Eha’ discussion televised live on Independent Television Network (ITN).

“The Extended Fund Facility (EFF) programme depends on Sri Lanka’s economic situation and policy priorities, as well as the IMF’s technical assessment of the country’s financial and economic outlook. IMF Staff Level Agreements are very technical, so Sri Lankan authorities should not attempt to deviate from them for political reasons. What can Sri Lanka do if the IMF leaves the negotiating table”, he queried.

Further speaking he said:

“The IMF has made a careful analysis of Sri Lanka’s debt stock and has shown the country the way to manage its debt repayment under a ‘debt sustainability programme’. The macroeconomic targets were given to Sri Lanka by the IMF mainly based on this programme. You would have heard from time to time that IMF and Sri Lankan authorities came to Staff Level Agreements. Such an agreement is arrived at after lengthy debates and discussions between the two sides on technical points, fiscal situation and hard data. You asked me whether this agreement can be amended.

Yes, a new government coming to power can consider amendments to the agreement. But there arises the issue whether such amendments can be made without affecting the fiscal targets in the existing framework. For example, if tax revenue as a percentage of GDP is to be increased to 15.3% by 2027, it has got to be achieved, otherwise we won’t be able to continue working with the IMF programme. Alternate ways can be discussed as to how this tax share can be mobilized. But if someone suggests we abolish VAT and we collect taxes from tax evaders instead, the IMF knows that it can’t be done within the stipulated time frame. The IMF programme is crafted by experts based on data and analyses and timelines. If someone goes to the IMF and says the agreement needs to be amended, then the data which has already been used in the current programme would have to be proven erroneous.

Furthermore, the fact that we are entering into re-negotiations will mean that our credibility will be at stake. If that happens not only the IMF, the World Bank, the ADB, the bilateral and multilateral creditors also will begin to lose faith in us. Secondly, are there any countries in the world that amended IMF agreements and came out of their economic troubles? Greece attempted to do this, but it didn’t work. It is now said Greece will not be able to restore its pre-crisis level which prevailed in 2008, until 2031. This is the outcome of tinkering with the IMF programme. This is true for Argentina, Ecuador and other similar countries. So, attention must be paid to these international experiences when trying to make amendments to the IMF programme”

“Dr. Montek Singh Ahluwalia, a key player for over three decades in Indian economic reforms visited Sri Lanka some time back. When asked about amending the IMF agreement he said,” Trying to amend the agreement is imprudent. What you need to do is; show the IMF that you are acting upon achieving the given targets as quickly as possible because going into re-negotiations will reflect badly on staff level agreements and would have adverse consequences on Sri Lanka. Dr. Ahluwalia even said that such a move could draw flak from IMF officials.”

Professor Dunsinghe said that the IMF reform programme has been painful to the people, but it is now starting to bear fruit and urged Sri Lankans to move ahead on the difficult path to benefit from it.

“Within 2 years, Sri Lanka was able to come out of the crisis. Locally, this feat is not acknowledged due to political differences. But internationally, it is recognized as an unprecedented achievement. Sri Lankan people will have to wait until the plant becomes a tree and the tree gives its yield. We are an impatient nation that always rushed to eating the leaves before the fruits were borne. So, it will be useful to keep in mind that if we rush to eat the leaves again, we will miss the fruits.”