Sri Lanka’s Retirement Funds Sacrificed, People Overtaxed to Serve IMF Debt Conditions Saurav Kumar

Sri Lanka has passed more than a year of massive and protracted economic crisis making less headlines. But the ground reality reflect, the crisis doesn’t seem to be losing steam.

In terms of Sri Lankan rupees, the domestic debt of the country till March 2023 was totalled at 15.4 trillion, its external debt in foreign currency amounted to $36.1 billion.

And this year the International Monetary Fund (IMF) came forward to lend $3 billion to Sri Lanka when for the first time it failed to make the interest payment on its foreign debt in 2022.

Year 2023 did not bring much relief as the Sri Lankan economy shrank by 11% in the first quarter indicating the worst to follow.

The major factors that decide the persisting crisis of Sri Lanka are as follows:

Retirement Funds Fuels Economy

Amid steps to counter the spiralling crisis and in the name of IMF led debt restructuring, the government in June 2023 announced using domestic financial assets namely retirement funds.

It decided that the burden of reducing GDP’s debt-serving requirement by 0.5% should be borne by funds that include the Employees Provident Fund (EPF) and the Employees Trust Fund (ETF), which are the only savings available to a majority of working people.

Although this decision met vehement opposition by 82 trade unions.

As per a report, last year’s economic crisis led to the decline of real value of retirement funds by 40% and when they are chased in after a decade, the real value is set to dip further. And it will devastate the working class people of the country who are now grappling with multidimensional vulnerabilities.

In fact, EPF and ETF together make 14% of Sri Lanka’s financial assets.

Central Bank on IMF Tune

As per a Financial Times report, “The IMF’s new debt sustainability model focuses on “gross financing needs” instead of the net present value of Sri Lanka’s external debt. And the model seems to say that Sri Lanka’s debts are sustainable as long as it keeps gross financing needs below 13% of GDP.”

It also mentions that IMF’s revenue projections imply that Sri Lanka will spend about a third of its revenue on interest payments alone in years to come.

Moreover, the Central Bank of Sri Lanka is seen serving the interests of the IMF which is evident by the 3 March 2023 statement of the Monetary Board of the Central Bank.

It said, “Given the necessity of fulfilling all the ‘prior actions’ in order to move forward with the finalisation of the IMF Extended Fund Facility (EFF) arrangement, the Monetary Board and the IMF staff reached consensus to raise the policy interest rates, in a smaller magnitude, compared to the adjustment, which was envisaged during the initial stage of negotiations.”

Subsequently the interest rates were hiked to 16.5% from 15.5% a year ago.

Reacting to the decisions of the Central Bank of Sri Lanka, Senior Economist Dr. Ahilan Kadirgamar told Kanal, “The statement of the Monetary Board of the Central Bank illustrates the inability of Sri Lanka’s policymakers to think in the interest of the country, and how they blindly cow down to the demands of the IMF.”

The economist added, “more importantly it is evident of the lie about controlling inflation that is told to the public, even though it is about serving the class interests of global capital. Indeed, while the statement above talks about higher interest rates to “incentivise more foreign exchange flows in the period ahead”.

The IMF solution to Sri Lanka  is going to worsen the crisis, alarmed veteran economist C.P Chandrasekhar.

He wrote, “The IMF has decided to make all public debt—external and domestic—the source of the crisis. The problem, according to this perspective, is the unsustainable gross financing needs of the government—its overall new borrowing requirement plus debt maturing during the year—in the coming years.”

Overtaxing People

Abiding by the recommendations outlined in the IMF’s Staff Report, the Government of Sri Lanka increased electricity tariffs by 165% between June 2022 and February 2023.

The Government arguably applied reforms as mandated by the IMF, to achieve market pricing of the energy sector in Sri Lanka and reduce the debt of the Ceylon Electricity Board. But this was speculated to have paved the way for the private sector players.

On the other hand, the middle-class households were brought under immense tax pressure of regressive indirect taxes (VAT) that almost doubled to 15% between June and September 2022.

Food inflation shot up to almost 95% in September 2022, real wages have fallen by nearly 50% and 5 lakh jobs were lost in 2022.

Pandemic Hit Tourism and Tea

Two consecutive waves of COVID-19 pandemic in 2020-21 crippled Sri Lanka’s exports and services which accounts for 17.7% of GDP as of 2021.

Tourism sector, which is the third-largest foreign income generator, witnessed revenues decrease to $5.6 million in April 2021 from $6.20 million in March 2021.

The most shocking hit in terms of export was to that of the tea industry.

Tea, Sri Lanka’s one of the leading colonial-era export commodities, had to be imported from other countries. The estimated drop in export revenue from tea was $520 million. Tea exports had the steepest fall in 23 years and its per kilogram price surpassed to Rs. 1500, the highest in 127 years.

Disruption in production, supply and consumption with widespread factory closure led to a whooping loss of $1.5 billion to apparel export.

Overall Sri Lanka’s foreign currency shortages became a serious problem, income from exports to other countries remained low, while the bill for imports kept growing.

This self-inflicting policy of fertiliser import ban compelled farmers to use locally sourced organic fertilisers that led to widespread crop failures. Subsequently, Sri Lanka had to supplement its food stocks from abroad, which made its foreign currency shortage even worse.

The Neoliberal Connection

Sri Lanka in 1977-78 was the first country in South East Asia to embrace economic liberalisation thus becoming an export dependent economy. And after the opening up of the economy, the state sponsored program in 1983 led to the initiation of a 26-year-old civil war.

After the civil war ended in 2009, the Sri Lanka government pushed hard for liberalisation policies. The IMF gave a positive input to Sri Lanka to borrow money from the International Finance Market. Experts believe it led to the country’s continuation on the liberalisation trajectory which became the root cause of the crisis.

According to Prof. Jayati Ghosh, “the stock of external debt initially rose from just above $1 billion in 1977 to more than $5 billion in 1988, $9 billion in 1998 and $16 billion in 2008. But, following the global financial crisis, easy access to foreign liquidity encouraged governments to prime the economy with support from foreign capital, resulting in the stock of external debt rising to exceed $56 billion in 2020.”

(This article was originally published in thekanal.in on December 14, 2023)