The IMF programme is not a growth strategy

By Dhananath Fernando

Originally appeared on The Morning

Sri Lanka received about $ 695 million after the combined Fifth and Sixth Reviews of the International Monetary Fund (IMF) Extended Fund Facility. It is an important milestone. It gives the country some breathing space. It also confirms that we have done many things right since the crisis. But it also brings us closer to a reality check.

After almost four years of crisis management, we are beginning to realise that we have done very little beyond stabilisation. We fixed many of the things the IMF asked us to fix. We increased taxes. We restored cost reflective pricing. We improved fiscal discipline. We passed some important laws. We rebuilt some confidence.

But we have not done the big growth reforms this column has been arguing for over many years. The IMF programme has about nine months to go. The uncomfortable question is simple. What have we done to grow after the IMF programme ends?

Better numbers don’t mean a stronger economy

The answer is not very encouraging.

Land reforms for industries have been slow. Labour reforms that can respond to a declining labour force and very low female labour force participation have been pushed back. State-Owned Enterprise (SOE) reforms that can unlock economic resources and reduce fiscal risks have not moved at the required speed. Investment reforms, including a serious reform of the Board of Investment, are still largely under discussion. Trade agreements and better access to global markets have been kept on the backburner for political convenience.

What we have mainly done is revenue enhancement. Even there, a significant part of the recent improvement has come from vehicle imports. This is not a sustainable growth strategy.

Vehicle imports were reopened after years of restrictions. Naturally, there was pent-up demand. Imports surged. The Treasury received a large amount of revenue from duties and taxes. But this is a one-off source. We cannot import the same volume of vehicles every year and call it fiscal strength.

Already, vehicle registrations are slowing. The Government has also imposed an additional surcharge on Customs duty. That may bring some short-term revenue, but it also signals how dependent we have become on taxing imports rather than expanding the productive economy.

This is precisely the danger. We may come out of the IMF programme with better numbers, but without a stronger economy.

Some reforms have been scheduled so far into the future that they may never happen. Para-tariff removals, for instance, are expected to be phased out only by 2029; that is after the current IMF programme. The longer the delay, the more time lobbying groups have to protect their privileges. In Sri Lanka, reforms postponed are often reforms abandoned.

The post-IMF landscape

So what happens after the IMF programme?

Without growth reforms, we will slowly slide back. Not immediately. Not dramatically. But gradually. First, investment will remain weak. Then jobs will not grow fast enough. Then tax revenue will disappoint. Then debt repayment pressure will rise. Then the exchange rate will come under pressure. Then the same old arguments will return: control imports, subsidise energy, print money, blame external forces.

Unfortunately, external forces are not helping us either.

The IMF itself has warned that Sri Lanka’s 2026 growth outlook has weakened, with growth projected at around 3%. The Middle East conflict and the aftermath of Cyclone Ditwah have tilted risks to the downside. Higher oil prices can increase inflation, weaken the current account, and affect tourism. These are not theoretical risks for Sri Lanka. We are an energy-importing country. We do not have much room to absorb large shocks.

If rainfall weakens and hydropower generation drops, diesel-based power generation will rise. That means electricity costs will rise. If global diesel and crude prices rise further, the pressure will come through fuel, electricity, transport, food, and construction materials. Aluminium, steel, fertiliser, and agricultural products will also feel the impact through energy and logistics costs.

This is the problem with a weak economy. A global shock becomes a domestic crisis very quickly.

The IMF has also been clear that debt sustainability risks remain high. The debt trajectory can improve only if we maintain strong fiscal performance, keep inflation under control, and sustain growth. From 2027 onwards, Sri Lanka is expected to return to a primary balance target of 2.3% of GDP. That is not easy if growth is weak and revenue depends heavily on temporary windfalls such as vehicle imports.

In other words, the IMF programme can help us stabilise. But it cannot make us rich. It cannot create jobs for us. It cannot make our exports competitive. It cannot bring investors if our land, labour, tax, trade, and regulatory systems remain difficult. It cannot make our SOEs efficient if we do not have the political courage to reform them.

The IMF is not a substitute for a national growth strategy.

Building an economy that can stand on its own

What are the solutions?

There is no shortcut. We have to become responsible and do the growth reforms ourselves. The crisis forced us to do stabilisation reforms because the alternative was collapse. But growth reforms require a different kind of political courage. They do not always produce immediate results. They upset vested interests. They require explaining difficult choices to the public.

That is why we have avoided them.

If we cannot build that political will ourselves, we may again be pushed towards another IMF arrangement after this programme. There are IMF arrangements that may not require new money but can still provide policy credibility. Such an arrangement can reassure investors, reduce risk premiums, and lower borrowing costs. But politically, an IMF programme without money is a very difficult message to sell.

More importantly, another IMF programme can also become another way of kicking the can down the road. If growth reforms are not front-loaded, we will again reach the end of the next programme and ask the same question: what have we done for growth?

The better option is to build a domestic political consensus before the pressure returns.

Just as we have a Constitutional Council for important appointments, Sri Lanka needs a minimum national growth agenda agreed by the main political parties. It need not cover everything. It should focus on a few reforms that can deliver growth and jobs: land for investment, labour flexibility, public transport, SOE reform, faster investment approvals, trade facilitation, and a predictable tax regime.

The objective must be clear: Sri Lanka should aim for 5–8% growth, not 3% survival.

Some reforms can show results faster than others. Public transport reform can improve productivity quickly because millions of people lose time every day in bad transport. Labour reforms can help more women and young people enter the workforce. Investment approval reforms can quickly improve investor confidence. SOE reforms can release assets, reduce fiscal risks, and open space for private sector activity.

But these reforms must be owned by Sri Lanka, not outsourced to Washington.

The IMF has helped us avoid collapse. For that, the programme has been useful. But avoiding collapse is not the same as building prosperity. Stabilisation is the floor, not the ceiling.

The next nine months are important not because the IMF programme is ending, but because our excuse is ending. We can no longer say we are only managing the crisis. We now have to decide whether we are building an economy that can stand on its own.

By failing to reform, we are preparing ourselves to fail once again.

Sri Lanka needs a bottom-up approach

Originally appeared on The Morning

By Dhananath Fernando

Regrettably, over the years, Sri Lanka's approach to development has primarily relied on aid and subsidies for its impoverished population. Many politicians have spoken about poverty, but they have often neglected to address its root causes. If our policies were centered on eradicating poverty rather than simply targeting the poor, our development framework could have evolved significantly.

As the adage goes, "there are no poor people, only poor places or countries." A recent report by LirneAsia revealed a startling increase in poverty numbers, rising from 3 million to 7 million people, pushing over 4 million individuals below the poverty line. If our long-standing strategies, such as fertilizer subsidies, Samurdhi, and fuel subsidies were on the right track, how did an economic crisis suddenly plunge 4 million Sri Lankans into poverty?

The ability to maintain strong international relationships and secure more aid has been considered a crucial qualification for candidates, during election cycles. Within the voting community, politicians offering the most substantial subsidy handouts are often perceived as popular leaders. While it is true that we need comprehensive international relationships in modern politics and must take care of our citizens, we must do so while keeping a development-oriented mindset at the core. Regrettably, development cannot rely solely on foreign aid, nor can we lift people out of poverty by offering aid exclusively to the poor.

This situation is not unique to Sri Lanka; it's a global phenomenon. No country has achieved development solely through aid programs. Instead, countries that have reached the development stage share strong institutions and reasonably functioning market systems as common denominators.

The primary focus of any government or political leader should revolve around two key conceptual frameworks:

1. Are we establishing institutions that promote a level playing field?

2. Are we encouraging a functioning market system?

Development is generally a bottom-up approach. People often know what's best for themselves better than politicians or leaders do. We simply need to provide them with opportunities in a competitive environment. Recently, I had the privilege of meeting a few small and medium-sized exporters. The entire system and processes seemed designed to hinder their export activities. Many exporters emphasized the difficulties they face when exporting in Sri Lanka, including challenges and harassment from government regulatory authorities, such as Sri Lanka Customs.

A prime example of our low export numbers is not only market access problems but the barriers within our own system that obstruct exports. One exporter from Kandy, specializing in vanilla exports, highlighted how customs consistently questioned HS codes and demanded repetitive documentation, causing him to spend more time on export processes than on developing his product and capacity. These challenges are consistent across the board for exporters, explaining why Sri Lanka's exports remain stagnant despite numerous committees, task forces, and chairpersons at the Export Development Boards.

Real change should start from the bottom by removing barriers for businesses and offering people the freedom to pursue their desired endeavors. Such reforms may not bring personal glory, as they empower individuals to make their own choices. In contrast, an aid-driven approach often results in leaders or countries seeking personal recognition through associated aid packages.

In Sri Lanka's case, we must remind ourselves that only we can make a difference and pull ourselves out of this crisis. While we need the support of international institutions like the International Monetary Fund and bilateral and multilateral creditors, they alone cannot rescue us from our predicament. It is only through economic reforms and the development of inclusive institutions that we can compete on a level playing field and extricate ourselves from this mess. Both small and large reforms are essential, and we must implement them swiftly and effectively.

What next for Sri Lanka?

Originally appeared on The Morning.

By Dhananath Fernando

New predictions are emerging that debt restructuring and International Monetary Fund (IMF) Board-level agreement may take until the end of this year. Another ongoing discussion is about the Local Government Elections and postponement of elections. Electricity tariffs are to be increased and 10 banks have been downgraded by Fitch Ratings as a recalibration of Sri Lanka’s sovereign rating.

Overall, it appears that economic reforms are being sidelined faster than expected, without realising the consequences of each action. It is true these complicated problems have no easy, straightforward solutions. No solution will be perfect and the validity, impact, and effect of any solution will be weighed against time. To put it simply, a solution that appears valid and reasonable today may not sound reasonable in a few weeks or months.

Each action has its consequences and inaction will also have consequences. It will be a battle between the consequences of action and inaction and the continuation of this for the next few years.

Reforms and restructuring

Let’s take the case of reforming State-Owned Enterprises (SOEs). With the election cycle commencing with Local Government Elections, attempts at restructuring SOEs such as the Ceylon Electricity Board (CEB) may be delayed. This delay means that inefficiencies will continue and tariffs will be increased without any competitive basis. This will in turn impact all businesses as well as macroeconomic indicators given the monopoly and the size of the electricity business. It may also extend the duration of power cuts and pave the way for another wave of protests, worsening the business environment.

Reforms too will be painful. Trade unions and some employees will be affected and an electricity monopoly can interrupt the life of the common man in multiple ways, with political and capital implications.

The cost of not implementing reforms will be much higher politically and economically, as it would be a cyclical result. Therefore, the reasonable decision is to restructure loss-making SOEs. Unfortunately, there is no other way out and delaying this further may invite darker years in the future.

The delays in the debt restructuring process will have its own consequences, both economically and geopolitically. The debt restructuring delay is a repercussion of maintaining bad foreign relations.

Poor international relations

How we treated India over the Economic and Technology Cooperation Agreement (ETCA) and in discussions on the East Container Terminal was extremely unprofessional and irresponsible. There is a significant difference between disagreement, negotiation, and unprofessional treatment.

By suspending the Light Rail Transit (LRT) project, we lost the respect and trust of Japan. We even annoyed China with the fertiliser matter and continuous regulatory delays with the Port City project. Our relations with the Middle East deteriorated with the cremation of dead bodies of the Muslim community during Covid.

We are not even in the good books of the US over the way we dealt with the MCC grant. Simply put, we do not have a friend who will extend a helping hand during troubled times. It is said that countries have longer memories than people. As such, we have limited our options due to our own grave mistakes.

A stalemate in a crisis

Economics and politics often go hand in hand. During an economic crisis, instability in politics is unavoidable. Our President does not have a direct mandate and the composition of the Parliament may not really reflect the people’s voice with the dawn of the completely new sociopolitical environment.

This was one reason the discussion of a common minimum programme was floated by concerned individuals and professionals, but it appears that this too has been discarded, with everyone slowly turning their attention to the election cycle. The calibre of our politicians is too inferior for them to understand the dynamics involved and to come up with responsive and novel policies and political options.

We are now in a stalemate, with a lot of short-term distractions. In such situations, we become distracted and waste our time on non-value adding activities without realising the massive deterioration of the quality of life. A deeper analysis shows that while the absence of economic reforms is a major issue, the fragility of our institutions is a bigger concern, with the institutional capability for the functioning of a basic society being almost nonexistent.

Solutions

Appointing capable and credible human resources for debt negotiations with China is essential to avoid delays. Acceleration of debt restructuring will unblock many other barricades, enabling us to move forward. There is a huge vacuum of capable human resources needed to carry out reforms. Therefore, providing space for already appointed committees to recruit more capable people and working out a time-bound solution matrix is important. The solution now lies in setting up institutions that can execute reforms to get us the required results.

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

Promoting competition over price controls

Originally appeared on The Morning.

By Dhananath Fernando

The decision to import eggs is a classic example of how price controls are backfiring. It proves once again the main argument put forth by Advocata’s research report ‘Price Controls in Sri Lanka – Political Theatre’ published in 2018. It suggests that price controls are merely politically motivated and have never succeeded in bringing prices down. 

The story of price controls imposed on eggs has two sides. Firstly, it is about competitiveness. According to media reports, an imported egg can be sold for Rs. 25-30 while a local egg costs over Rs. 60. When an egg is imported, it involves both a value chain and the distribution of margins. At the production stage, the farmer keeps a margin. 

Secondly, there are taxes and storage charges at customs of the particular country we import eggs from. There are also charges for insurance and shipping. Once the consignment reaches Sri Lanka, there will be tariffs and handling charges imposed by Sri Lanka Customs. There may also be storage expenses in Sri Lanka and the importer and retailer will keep the margins. Even with all these costs, local eggs are almost twice as expensive as imported ones. This indicates the inefficiency of local egg production. 

Restrictions hamstring production  

A primary reason for the uncompetitive and expensive nature of local egg production is the price controls imposed by the Consumer Affairs Authority (CAA). A few months ago, the CAA imposed price controls, expecting a drop in prices. As we all remember, eggs simply disappeared from the market. 

The poultry industry as a whole was also challenged. No poultry farmer could survive at the prices set by the CAA. Some micro- and small-scale poultry farmers had to scale down while some had to close down. They sold their laying hens for meat amid the price controls. Daily production of eggs dropped to about four million per day from seven million. The price cap was later increased but the damage had already been done. Additionally, due to import controls, essential chemicals for the poultry industry were in shortage.

As a result, the poultry supply contracted and led to a price hike. Now we expect to import eggs. Accordingly, the price controls not only increased prices but also damaged the efficiency of the industry. 

We often forget that markets are interconnected. The poultry industry is often interlinked with maize production as it is the main source of food for poultry. Price fluctuations of maize affect the prices of chicken and eggs. Any intervention in the form of price controls, import controls, or regulation has a direct impact on the industry. 

It was not the first time we faced such a situation. Many governments and many trade ministers fell into the same trap over and over again by failing to understand the fundamentals. 

To recall some incidents in the recent past, there was a price cap of Rs. 60 per 1 kg of dhal and Rs. 100 for tin fish during the Covid-19 pandemic. Just compare these prices now. There was also a price cap for rice and at one point, a former military officer was appointed to conduct field raids on rice mills. 

There were times a price ceiling was imposed on hoppers and egg hoppers. Similarly, in 2015, there was a price cap on plain tea and tea. In the same year, price controls were imposed on broiler chicken. Traders started selling chicken parts instead of whole chicken to avoid price controls. Have you ever noticed prices being reduced due to price controls? The simple answer is no. 

Instead, things worsened. After repeating the same mistake over and over again, the poultry industry experienced the same bitter results. Its effect was felt not only by the poultry industry, but by the poorest sections of the population as well. 

Eggs are a necessary protein intake for the poor as they do not have refrigerators for storage. Eggs are also one of the main ingredients in the bakery and restaurants industries, which involve an extended value chain. Everything has been affected and some restaurants have even had to downsize their menus due to unavailability of eggs at one point.       

Solution 

Improved efficiency in local egg production is important to reduce the cost per egg and increase the output, thereby reducing the price of eggs. The farmers in India and Pakistan are doing something right to be able to sell eggs at Rs. 35 after passing through many touchpoints and cost centres. 

We have to make ourselves productive and efficient. Efficiency works when there is competition and when we allow competition to work. We cannot restrict competition for selected markets because one way or the other, all markets are interconnected. We have to redesign the CAA as an agency to promote competition and not as an agency to regulate prices. 

The same is valid for the Public Utilities Commission of Sri Lanka (PUCSL). The solution is setting up institutions to accelerate competition across all industries. The role of the Government is to remove barriers for market operations, not to control prices. Price controls make things worse and it cannot bring down prices, but it will kill the industry and many other connected industries.  

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.