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Another tranche of the Extended Fund Facility of about US$ 337 million is expected after the Executive Board approves the recommendation of the Review Mission.

However, the unfolding political developments have cast doubt on whether the agreement with the International Monetary Fund (IMF) will be continued. The discontinuance of the agreement would no doubt result in an economic crisis of severe proportions.

Implementation

The government said the implementation of the reform programme was delayed due to it being an election year and, therefore, the next consultation with the IMF and the next tranche of the Extended Finance Facility could be delayed. Later, the State Minister of Finance said the reform programme would go on as planned.

We would only know what would happen with the unfolding of time. The run-up to the elections will no doubt be a difficult time to implement reforms.

Political parties

The stance of some opposition political parties could be a threat to the continuation of the IMF agreement, as they are against important conditions in it.

It is vitally important for the leading parties to disclose their economic policies. The position of the two main opposition political parties—the SJB and the JVP-led NPP—in respect of the EFF is critical for the future as this is an election year.

At various times, these parties have expressed views that they would reject or renegotiate certain IMF conditions.

Change

Of late, the NPP appears to be taking a more moderate stance in negotiating for a change in the conditions, such as the modification of the system of taxes and perhaps the reduction of the conditions of repayment. However, it is opposed to the privatisation of state enterprises.

It is vitally important that the positions of the two main opposition parties are clear.

Elections

There will be a tendency for the opposition parties to take a stand against the IMF, as over the years, a popular antagonism has been built up against the IMF and World Bank as imperialist institutions. How the JVP, in particular, would balance its electoral rhetoric and realistic economic policies is left to be seen.

Joint meeting

The two main political parties rejected the offer of meeting the IMF team at a meeting arranged by the President. Instead, separate meetings were arranged for each party to meet the team.

SJB

The SJB and opposition leader Sajith Premadasa met with the IMF. Their position was that they would continue with the IMF agreement. However, they pushed for a reduction of personal income taxes and the Value-Added Tax (VAT). They also sought financial assistance to improve the poverty situation and reduce the increasing malnutrition.

Whether the IMF would agree to such a reduction of taxes is uncertain. There is no doubt that a more equitable and progressive tax structure is vitally important. Furthermore, the system of taxation must recognise the administrative incapacity and corruption of the administration.

This is already apparent as several tax proposals, such as the requirement of a Tax Identification Number (TIN), have been postponed.

Significant

What is, however, significant is that an SJB government will continue with the IMF agreement and devise more equitable ways of raising revenue.

Our proposal

Last Sunday’s column spelled out a two-pronged strategy of increasing revenue through expenditure taxes and reducing wasteful expenditures. What is important for the IMF is the reduction of the fiscal deficit rather than specific revenue measures. Therefore, the opposition should suggest such measures.

Nevertheless, a significant development was that the NPP, too, said it would continue with the IMF arrangement but disagreed with many important conditions in it. Its opposition to the privatisation of state enterprises is a serious difference that could result in the termination of the IMF agreement.

NPP

The position of the NPP on its economic policies has never been clear. It has made statements that it would find a homegrown solution, develop the real estate sector, increase exports, provide jobs for all, and make similar expressions of good intent.

What policies the party would follow to achieve these are not clear.

Opposed

The NPP has opposed the tax regime and said it will give relief to low-income earners, perhaps by raising the threshold for taxation and increasing taxes that fall on the rich. It has also said it is not opposed to the rich, who play an important role in increasing national output. The party’s programme is likely to have high taxation on wealth and high incomes. It is likely to tax the rich and super-rich and impose high taxes, both direct and indirect, whose incidence falls on the rich.

Privatisation

The NPP’s opposition to privatisation is a clear disagreement with the IMF reform agenda. This means the abandonment of the IMF agreement for the 17th time if the JVP forms a government.

Economic revival

There can be no doubt that the country was able to revive the economy from its bankrupt state mainly because of IMF assistance. Although the economy is on a growth path, there are many more reforms to undertake to ensure stability and growth. The abandonment of the IMF agreement at this stage would be a serious setback to the economy. It would be very difficult to rise from another economic crisis.

Summing up

The continuity of the IMF programme is vital for economic stability and growth. Abandoning it will be suicidal. There is much uncertainty as to who will be elected as president and which party will control parliament. In fact, there is a possibility that no one will get over 50 percent of the vote, even with the counting of the preference vote, and a hung parliament is more than likely.

This state of affairs would jeopardise the implementation of the IMF programme. Furthermore, the opposition parties’ requirement to change the conditions of the programme could also be a severe threat to the continuation of the IMF assistance. This is especially so, with respect to the reform of state-owned enterprises.