Brussels (08/11 – 50)
On March 20, the IMF approved a $3 billion Extended Fund Facility (EFF) to support Sri Lanka amid its economic crisis. The approval is expected to pave the way for other financial institutions to extend support to the bankrupt South Asian country. IMF program was made possible largely due to the untiring efforts of the President Ranil Wickremesinghe.
The IMF links financial assistance to a country to policy reform, a conditionality that usually imposes political as well as economic changes in the recipient nation. The logic behind IMF conditionality is multifold. It is supposed to prevent moral hazard by governments that receive loans. These conditions allow the IMF to monitor the behavior of the recipient states and allegedly promote best practices and good governance.
Sri Lanka has been to the IMF 16 times before; five of these since 2000. The full amount of the IMF loan was not disbursed on six occasions because Sri Lanka did not fully comply with the conditions of the loans. This included the previous EFF in 2016, when the conditions imposed by the IMF built additional pressure on the domestic economy. There has been much skepticism about Sri Lanka adhering to the more stringent IMF conditions this time around.
Despite the skepticism that prevails among journalists and economists, the IMF is very happy about the progress Sri Lanka is making on the commitments it made as a part of the IMF’s four-year EFF to the country.
An IMF delegation, which was in Colombo recently to assess the progress of the agreement, is optimistic. IMF Director of Asia and Pacific Department Krishna Srinivasan told a press conference in Colombo on May 15 that the Sri Lankan government has shown “commitment to the reform effort” that is a part of the agreement with the IMF. He added that the “authorities are making good faith efforts to negotiate with all the creditors, both private creditors and official creditors.”
Ranil Wickremesinghe took over as President of Sri Lanka in July 2022 when the country was in the middle of its worst economic and political crisis since independence in 1948. On March 20, 2023, the IMF approved a $3 billion Extended Fund Facility (EFF) to support Sri Lanka amid its economic crisis.
Peter Breuer, IMF’s Senior Mission Chief for Sri Lanka, Asia, and Pacific Department said they “see things developing more or less in line with expectations.”
Srinivasan added that Sri Lanka had to complete a number of prior actions before the IMF approved its bailout package. These actions were extensive and required a significant commitment from the Sri Lankan government.
Among these are cost-reflective of a number of goods and services that the government had subsidized for decades. Sarwat Jahan, the IMF Resident Representative in Sri Lanka said the Ceylon Petroleum Corporation (CPC) and Ceylon Electricity Board (CEB) would have to recover their costs until the end of the IMF program.
The government met all these requirements, which shows that they are serious about implementing the reforms necessary to address the country’s economic crisis, Srinivasan said.
The conditions attached to IMF loans often involve actions aimed at discontinuing industry subsidies, avoiding exchange rate manipulation, adjusting budget priorities, and regulating wage levels. Leaders, who face diverse political limitations, differ in their willingness to engage in an agreement with the IMF and make compromises in these four areas.
Considering that IMF loan conditionality agreements usually involve implementing fiscal austerity measures, leaders with larger winning coalitions will encounter more challenges when attempting to negotiate an agreement for IMF financing.
On the other hand, when a regime maintains power through a narrower network of closely-connected supporters, he or she finds it easier to enter into an agreement with the IMF.
Miles Kahler, a senior fellow for global governance at the Council on Foreign Relations in Washington, DC, in his 1993 book chapter titled “Bargaining with the IMF: Two-Level Strategies and Developing Countries,” outlines two key aspects of domestic politics that influence the process of loan negotiations: firstly, the degree to which a technocratic elite is insulated from economic interests, and secondly, the frequency with which elites face political challenges like elections.
Another factor that can impede the formation of a loan agreement is the presence of multiple veto actors, such as a separation of powers or the existence of multiparty governing coalitions.
Kahler says that when a country has a higher number of veto actors capable of obstructing a loan agreement, the scope of domestic political consensus becomes narrower, resulting in increased negotiation costs for the IMF. Typically, the count of veto actors is determined by assessing the number of parties in a government coalition in countries where genuine political competition exists.
This explains why it was extremely difficult for former President Gotabaya Rajapaksa, who came into power through a coalition of populism and with the support of a number of interest groups, from big businesses to professional associations, to enter into negotiations with the IMF.
On the other hand, Wickremesinghe is the head of the United National Party, a political party that obtained around 250,000 votes from 15 million eligible voters. He has one MP in Parliament, Wajira Abeywardana, who is a staunch loyalist. Wickremesinghe is backed in parliament by the Sri Lanka Podujana Peramuna (SLPP), whose MPs depend on him for political survival and would vote for any legislation that he brings forth.
Sri Lankan legislators are entitled to several perks at the end of the full tenure of five years and most of the SLPP MPs that back Wickremesinghe are adamant on completing their terms. Wickremesinghe has also indicated that there will be no elections until the economy is stabilized and it is likely that the first election Sri Lankans will see is a presidential election, probably in 2024.
Therefore, Wickremesinghe can implement the IMF recommendations completely, as he is not answerable to any political coalition or interest groups. Neither does he face an election. Wickremesinghe’s personal ideology also aligns with that of the IMF. It is unlikely that these factors were ignored by the IMF when the loan was approved and when they evaluate whether Sri Lanka will adhere to IMF conditionalities.
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