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The perilous state of the economy is evident from the scarcities of essential items. Shortages of food, fuel, fertiliser, and medicines have driven people to desperation, protests and violence. The country has no capacity to import these essential goods owing to the negligible amount of foreign reserves.

Will the new leadership of Prime Minister Ranil Wickremesinghe be able to rescue the country’s sinking economy?

Foreign assistance

The country can only be rescued by foreign assistance. Can the new Prime Minister Ranil Wickremesinghe rescue the country by obtaining adequate foreign assistance?

Priorities

No doubt the economic priorities are to resolve the shortages of essentials but they are the symptoms of deep-seated structural problems that have to be addressed. The restructuring of the country’s debt repayment is almost an insurmountable problem.

Prime Minister Wickremesinghe understands the priorities that need to be addressed. He has announced that his priority is to ensure that people have three meals a day and have medicines, kerosene, diesel, and petrol for their livelihoods.

Foreign assistance

These have to be provided by international organisations and friendly countries, as the country has no foreign reserves for their import.The Prime Minister has spoken to India, Japan, the US, UK, Australia and China, and the Asian Development Bank (ADB) and World Bank to obtain emergency aid.

The government is in conversation with the International Monetary Fund(IMF) to arrange for a longer-term credit facility, assistance in the restructuring of debt, and a reform agenda to stabilise the economy.

Reversal

The two grievous mistakes that President Gotabaya Rajapaksa admitted he had made–banning chemical fertilisers and not seeking IMF assistance–is being rectified. The government has begun negotiations with the IMF and has obtained chemical fertiliserfrom India for food production.

Delay

While immediate assistance is likely, it may take some time as each country and organisation has its procedures for granting such assistance. Hopefully, such assistance would come speedily enough to solve the shortages of food, fuel, medicines, and other essentials.

Production

The unavailability of these essentials and the consequent long queues and protests are hindering the country’s production capacity. The shortages of diesel, petrol, and electricity have reduced industrial production.

The unavailability of fertilisers and agrochemicals has reduced food production, increased food imports, and reduced especially tea exports. The availability of fertiliser and agrochemicals would improve export earnings and reduce food imports. Fertilisers are being imported from India.

Financial assistance

The immediate need is to obtain financial and commodity assistance to resolve the scarcities of food, fuel, medicine and other essentials. The early resolution of these scarcities would not only assist the livelihoods of people and reduce protests and violence, but also increase the production of goods and services.

The resolution of these shortages is a priority, but inadequate for stabilisation of the economy and increasing its production capacity. Obtaining the assistance of the IMF is vital for the stabilisation of the economy and enhancing its growth. The current discussions with the IMF is towards this end.

Debt repayment

At present, the main preoccupation of the government, as well as the concern of the people, is the severe shortage of foreign currency for essential imports. However, a paramount concern is the enormous debt repayment problem. The foreign debt of over US$ 50 billion is an insurmountable burden.

Fundamental problem

Foreign assistance would provide a breathing space to overcome the severe scarcities that threaten the lives of people. Immediate and short-term remedial measures could redeem the immediate problems to some extent. However, the fundamental problems of the economy could be resolved only by comprehensive reforms. These are painful and difficult to implement due to their political unpopularity and our political culture. They are however imperative.

Balance of payments

The fundamental cause for the economic problem lies in the weakness in the balance of payments.The country imports more than it exports: Consumes more than it earns, and borrows to sustain itself.

The ultimate and sustainable solution to the balance of payments crisis is the adoption of macroeconomic reforms. This financial vulnerability is a fundamental disequilibrium that has to be resolved by reforming the economy.

Longer view

The most important and most difficult is the adoption of economic reforms that would stabilise the economy. Macro-economic policies must stabilise the economy. These would include the containment of the fiscal deficit, reduction of money expansion and reduction of losses in state enterprises. Unless these reforms are effectively implemented, the country would continue to live beyond its means and the balance of payments would widen, reserves would decline and debt repayment difficult.

Final word

Reform or Perish. Will the government undertake the reforms?