An Alternative To The Alternative

By Uditha Devapriya –SEPTEMBER 25, 2021

Uditha Devapriya

Advocata Institute’s “A Framework for Economic Recovery” is both comprehensive and succinct. A response to the spiralling crisis in Sri Lanka, its publication has been well timed. Striking a realistic and pragmatist note, it foretells the worst for the country, unless certain urgent reforms are implemented. What it admits at the beginning is that the pandemic only highlighted the need for such reforms; the problems they seek to resolve have been in the offing since independence. If the present government is to address them, it should address two concerns: its fiscal and external current account deficits.

The Framework is in two parts. In the first, titled “Macroeconomic Stabilisation”, its authors propose six reforms based on the six pillars of the IMF’s Extended Fund Facility programme: fiscal consolidation, revenue mobilisation, public sector reforms, reforms of SOEs, monetary policy effectiveness and exchange rate flexibility, and trade and investment. These reform proposals reflect Advocata’s abiding belief that trade, not manufacturing and production, is what will reverse Sri Lanka’s diminishing economic fortunes. Outlining six options for the Sri Lankan government, the authors recommend a debt restructuring strategy, which requires going to the IMF. For Advocata, all other cards on the table, including sovereign default and debt monetisation, remain untenable and unadvisable.

Yet going to the IMF means enacting certain important, far-reaching changes. These the Framework delves into in the second section, titled “Structural Reforms for Sustainable and Inclusive Growth.” The authors propose five reforms: improving Sri Lanka’s Doing Business Environment and global competitiveness, increasing access to land, making labour markets more open and flexible, building human capital through health and education reforms, and developing infrastructure through, inter alia, public-private partnerships. If these proposals are not fast-tracked, we are told, Sri Lanka will keep on consuming more than what it earns and produces. The authors mention 16 IMF programmes it has gone through over 50 years, even though they don’t clarify whether these resolved problems so well that we do not have to go for a 17th. But their message is clear: to the IMF we must go.

Among elite political circles, going to the IMF has become a mantra of the hour. To quote Devaka Gunawardena, there is in general an “unshakeable belief” that doing so will provide “a pathway for Sri Lanka out of crisis.” Undergirding this sentiment, obviously, has been the economic woes of the country. The statistics tell us perhaps half the story, but they do paint a dire picture: on nearly every front, from unemployment to inflation to foreign reserves, Sri Lanka faces a reckoning in the not-so distant future. While the Governor of the Central Bank has repeatedly assured both locals and foreign investors, most recently via an interview with Bloomberg, that the country faces no imminent risk of default and hence will not resort to a debt restructuring programme, this has done little to reassure his critics. In the face of what many consider as a deeply unpopular administration, such optimistic predictions continue to be met with scepticism. In short, people are angry, and want a way out.

Opinion regarding the IMF option remains divided, though economists tend to favour it. While Devaka Gunawardena’s intervention (published by the Social Scientists’ Association) does show that civil society views this option critically, elite MPs and policymakers continue to promote it. Their rationale is that we don’t have a choice: to handle economic woes, we need to go for the kill by way of fiscal consolidation. Partly because these policymakers are in a majority, until recently next to no debates regarding this cropped up. Gunawardena’s critique was crucial, in that sense, because it enabled such debates: where once arid winds blew, now a thriving dialogue ensues. Although these remain limited to the English media, there are signs that the Sinhala media is picking them up. What used to be a monologue has thus turned into a conversation, with various stakeholders pitching in.

These debates have entered the political field as well. To say the lines are drawn between the Opposition and the government, with the former for and the latter against the IMF line, though, would be to simplify a complex political issue: the most crucial lines of debate have crept up, not between the SJB and the SLPP, but within the SJB itself.

Hence while the likes of Harsha de Silva advocate Advocata’s proposals, other SJB MPs have stopped short of endorsing those proposals, suggesting in their place welfarist measures like controlling food prices and clamping down on private mafias. In fact the latter MPs seem to resemble their counterparts from the NPP and the FSP, who have highlighted the inexorable contrasts of poverty and affluence that the pandemic has thrown up. Such divisions have in turn opened up rifts within the SJB, between its right and left wings.

Advocata’s point about the futility of denying the crisis is, all things considered, correct: in the absence of an alternative, we may run out of alternatives. But what of the solutions it prescribes? The Framework projects an almost Panglossian belief in the private sector: its whole focus is on tapping the potential of the market. This is a line that has been touted by previous administrations; to a certain extent, even by Mahinda Rajapaksa’s. Indeed, if faith in the efficiency of the market can be considered a good yardstick for the prospects of the economy, those prospects would have improved a long time ago. That they have not, so far, implies that such assumptions and paradigms are not beyond critique.

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