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ECONOMYNEXT – Sri Lanka Central Bank Governor Nandalal Weerasinghe warned the public that the country could return to the 2022 crisis if a future government endorses the current International Monetary Fund (IMF) for economic policies and reforms.

Weerasinghe said there is hardly any room for maneuverable economic policies in the current situation, but some adjustments can be made without changing the overall objectives that President Ranil Wickremesinghe’s government agreed with the IMF.

Sri Lanka is on a recovery path after striking an IMF deal with a number of difficult reforms, including higher taxes, sharp cuts to government institutions, drastic reforms in state-owned enterprises and a stable, inflation-targeted monetary policy.

“We have to continue the same process in the future and if any deviation occurs, it would be a challenge. That is the important message we want to give,” Weerasinghe told reporters at a media briefing in Colombo on Tuesday.

“This is to create public awareness because the public are the final decision makers. People must be aware that if we deviate from the current economic policies, there is a risk that we will return to a situation like the previous crisis,” he said referring to the unprecedented economic crisis of 2022 when asked whether he would like to appoint a new government warned after the crisis. a possible election later this year.

“It is not a matter of which government. It’s about the importance of continuing the same economic policies in the future. What we have done is we have informed the public that the economy could return to the situation of the previous crisis if we do not continue with the current policies.”

STABILITY RETURNS

Thanks to the ongoing IMF program, the island nation has enjoyed economic stability.

The rupee has appreciated, inflation has fallen from a record high of over 70 percent to below the mid-single digits, tax revenues have risen, loss-making state-owned enterprises have reversed major losses, market interest rates have fallen from over 30 percent to a third and the economy has shown quarter-on-quarter growth, after shrinking in six quarters.

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

Opposition parties, including the centre-right Samagi Jana Balawegaya (SJB) and the Marxist Janatha Vimukthi Peremuna-led National People’s Power (NPP), have said they will review some IMF conditionality as some policies, including higher taxes, caused public inconvenience.

Weerasinghe said the IMF deal has undergone a number of ongoing changes since the global lender’s staff-level agreement was released in September 2022.

“Changes do not address the direction of fiscal consolidation, the need to increase revenues, the need to restrain expenditures, the need to maintain stable expenditures. We need to build reserves and maintain financial stability,” he said.

“CANNOT BE CHANGED”

Weerasinghe’s comments come as the island nation is due to go to presidential elections between September 18 and October 18 this year.

Political uncertainty has increased as no winner has yet been predicted in the upcoming polls. Opposition parties SJB and NPP are said to be leading in some informal polls, but no polls have been done to find the leading candidate in the upcoming poll.

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

“These cannot be changed in the future under any administration,” Weerasinghe said, referring to the IMF’s key objectives.

“But within the way we are going to achieve those objectives, for example increasing turnover or achieving primary surpluses, there may be different means and ways to achieve the same goal. That is up to each assessment.”

“If you look at the first review, the second review and the third review, changes were made to each document. In the same way, it is a continuous review process, once every six months, depending on the situation, depending on what we consider to be the best policy.”

“Each government, finance ministry and central bank can negotiate and agree to different conditions at short notice. But overall, it is crucial that debt sustainability is restored in the medium to long term and that the economy grows at a reasonable pace, that there is fiscal sustainability, that monetary sustainability is ensured and that financial stability is guaranteed. Those are the most important.”

He said that in addition to the main objectives, other reforms need to be achieved, such as reducing corruption and expanding social safety nets.

“What our position is here is that there have been ongoing reviews within that. It (the IMF agreement) is not something that is fixed for the next ten years, or it is not something that is fixed for the next four years, or it is not something that is fixed for the next year.”

“If you look at the program every six months, there are changes from one to the next. These types of changes can happen depending on the overall path, the direction should remain as it is.

Weerasinghe also said the country may face external challenges possibly due to the rise in oil prices, global uncertainty and geopolitical issues.

“They can come from the external sector, outside the country. These can also be challenges. One of these could be global monetary policy. if there is a different expectation, market instabilities and capital flows may arise,” he said.

“But essentially I see it as a challenge to continue the same policies regardless of governments. That is the main challenge.” (Colombo/May 7, 2024)

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