Columns

The expected economic growth of 4 percent for this year is being achieved amidst political uncertainties and social unrest. In spite of this, poverty and malnutrition have increased, real incomes have declined, and health services have deteriorated. There is a large exodus of the workforce.

The country’s long-term development capacity is being eroded. On the other hand, the IMF, in its most recent statement, has stressed the need to improve revenue collection and reduce expenditure in the 2025 budget a newly elected government will present.

Growth

The government’s expectation of a 4 percent GDP growth this year is fraught with considerable uncertainties. Other international agencies, such as the World Bank, expect only 2 to 3 percent growth. Nevertheless, the economy has reversed its economic contraction to growth.

Elections

This year, the country’s focus has been on politics rather than the economy. It has been a period of protests about new taxation measures and inadequate wages. Despite this, the economy has made progress. Macroeconomic indicators have improved and external reserves have increased.

Prices

Although prices have increased, the rate of inflation has fallen, government revenue has increased, the trade deficit has narrowed, and there has been an improvement in exports while remittances and earnings from tourism have increased, contributing to a rise in external reserves.

Politics

Political uncertainties have grown, and much confusion has gripped the nation. The country’s political future and economic policies remain uncertain.

Macroeconomic indicators

The Central Bank expects the economy to grow at 4 percent this year. The external reserves have increased to US$5.1 billion with the inclusion of a yuan facility of about US$ 1.5 billion that can be used only to pay for Chinese imports. The trade deficit narrowed owing to an increase in exports, and the balance of payments surplus is expected to increase due to increased remittances and earnings from tourism.

Remittances and tourism

Remittances are expected to exceed US$5 billion, while earnings from tourism are expected to reach a record US$5 billion. There can be no doubt that the economy is on a path to recovery. However, there are external and internal shocks that can upset these expectations. The escalation of the ongoing wars and insecurity globally and unrest in the country due to the elections could affect remittances and earnings from tourism adversely.

Despite these favourable economic developments, poverty and malnutrition have increased, and living costs have risen. Consequently, the opposition parties have promised to modify the IMF conditions that have brought about this situation.

Is the IMF agreement likely to be abrogated, or will the IMF make some adjustments to enable the continuation of its programme? This is indeed a crucial issue for the economy and country.

Opposition parties

The two main opposition parties have promised to modify the IMF conditions. They want to modify the conditions to end the difficulties that people are forced to go through due to higher taxes. Will the IMF devise policies that will make their structural adjustments have a human face?

IMF assessment

The IMF team that visited the country recently said that the progress of the economy was knife-edged and the economic recovery was still at a critical juncture. Furthermore, it stressed that ensuring the timely implementation of commitments was critical to cementing the hard-won economic progress. It said that maintaining macroeconomic stability and restoring debt sustainability require further efforts to raise revenues. The IMF said that the 2025 Budget needs to be underpinned by appropriate revenue measures and continued spending restraint to reach the medium-term primary balance objective of 2.3 percent of GDP. The IMF statement after the recent review has no signs of such a shift.

Statement

The IMF said that policy slippage may derail recovery. “As Sri Lanka’s fragile economic recovery enters a crucial phase, the IMF has stressed the importance of sustaining reform efforts to ensure long-term stability.”

In the statement issued after its recent mission to Colombo, the IMF highlighted the need for continued fiscal discipline and strategic revenue generation to solidify the nation’s progress. The IMF underscored the necessity of raising fiscal revenues as part of the 2025 budget. This is pivotal to achieving a primary balance target of 2.3 percent of GDP—a key metric for restoring debt sustainability.

Summary

Despite macroeconomic indicators improving this year, there has been considerable social unrest as the living conditions of a large proportion of the population have deteriorated. The popular perception of this is that this is due to the taxation measures introduced as conditions of the IMF agreement. Consequently, the opposition parties are clamouring for these conditions to be changed and have vowed to renegotiate the agreement. Whether this is feasible remains to be seen.

On the other hand, the IMF considers the economy on a knife edge and susceptible to being fragile. It advocates a higher revenue collection in the 2025 Budget and a curtailment of expenditure. Both these are difficult.

At this time of political uncertainty, officials who are responsible must devise ways and means by which the needed fiscal outcomes could be realised. They must devise revenue proposals that are implemented to achieve higher revenue. They must be forthright in their proposals to curtail government expenditure rather than agree to the government, whichever it be. The intricacies of fiscal management can only be affected by competent fiscal management expertise.

Conclusion

The outcome of the presidential election on September 21 will be crucial for the economic development of the country. The best option will be for the continuity of the IMF programme with modifications that ensure fiscal consolidation while reducing the burdens on the people. Can the government come up with such a policy package?

Whoever forms the government, the road ahead is indeed a difficult one.