Why Sri Lanka’s economic policy trajectory must change

After all these disastrous policy choices, what would be an actual course correction that alleviates people’s suffering?– Pic by Ruwan Walpola 

Sri Lanka’s elite has missed many opportunities to reduce the severity of the present economic crisis. It ignored calls to invest in food production and self-sufficiency, even as the crisis became more and more apparent. It frittered away precious time to drastically reform the balance between imports and exports, which, because of the delay, reduced the country’s bargaining power with external creditors to zero. Meanwhile, it has swung between either ignoring the problem or claiming that austerity in the middle of an economic depression is the solution. The policy choices at each of these moments have been disastrous for our working people.

After several months now of a change in economic policy trajectory, we can already see what continuing down the path of austerity would mean. Accordingly, it is crucial that the struggles now converging on regime change also democratise the economic policymaking process to prioritise the concerns of the public. The market-oriented ideological bent of those in power and for that matter the Opposition in Parliament can further devastate the economic lives of our people. The desperate need is course correction of the economic policy trajectory, for which we as a people take responsibility for Sri Lanka’s future rather than surrender ourselves to the belief that the IMF can solve the country’s problems.

The question of who bears the burden must come to the fore in all discussions about making “difficult” policy choices. Specifically, whichever interim government that comes into power after this failed regime must understand that there are clear guardrails. The people’s movement will prevent any successor government from continuing to impose severe cuts on the masses. They will bring up the question of class. It will not be enough to gesture to the demands of creditors to waive away the need for redistribution. This struggle will continue, even while organising and mobilising is undertaken to prepare for a substantive economic overhaul once elections become possible.

Recent policy consequences

We must re-emphasise the same points that we made earlier regarding the economic policies over the last many months that claimed to offer a course correction, but which, in fact, have made a difficult situation even worse. These policies, many of which were recommendations of the IMF in its Staff Report made public in March 2022, have further aggravated the economic crisis that spiralled out of control because of the mismanagement of Gotabaya Rajapaksa’s Government.

The sudden floating of the rupee, without State relief, has doubled the costs of many essential goods for the working people. The timing of the floating of the rupee, with no regard for the war in Ukraine and the global price hikes, even caused some essential food items such as bread to triple.

Raising the Central Bank’s policy rate from 6% to 14% under the guise of addressing inflation is now crippling small producers, for whom the cost of borrowing working capital has more than doubled. The rate for pawning gold jewellery – the emergency liquid asset of working people – has increased from 9% to 25%. This alone risks widespread dispossession of people’s assets, which they have accumulated over generations.

Austerity measures that have brought a halt government expenditure amidst this crisis are further undermining the seasonal income streams of the informal sector. They depend on construction and road works during the off-season of agriculture, fisheries and similar livelihoods.

The market pricing of energy has led to a situation where fuel prices, particularly of petrol and diesel, have more than tripled. In addition to shortages, these price increases are bringing the entire economy to a grinding halt. Kerosene oil, which is used by working people for cooking as well as to irrigate small farms and as fuel for boats by small-scale fishermen, are being supplied in meagre quantities to avoid providing them the subsidy. These price shocks and shortages are undermining much needed local food production.

Increasing the Value-Added Tax from 8% to 12% has been a further punishing cost imposed on all, without any consideration of taxing the wealthy instead. Deficit spending has only been used to pay for government staff salaries. In contrast, there has been little relief for the working people involved in the large informal sector.

Finally, desperate to reach an IMF agreement, the Government took the disastrous neoliberal advice to pre-emptive default on its external debt. Sri Lanka is now caught in the trap of the IMF demanding that it first negotiate debt restructuring with its creditors. The country is unable to gain short-term credit from its donors such as Japan and China. And its international financial transactions, including the ability to purchase essential goods on credit, have also been severely disrupted.

Hard-headed negotiations

After all these disastrous policy choices, what would be an actual course correction that alleviates people’s suffering? The only way out is to think about the ways of reviving Sri Lanka’s bargaining power by envisioning a redistributive economic framework. For several months now, we have seen what happens when the Government blindly follows IMF recommendations. The urgent need is a critical debate over the economic dimensions restructuring the country’s debt, which are to be eventually negotiated. While the IMF is one piece of the puzzle, it exists in a broader global network of competing geopolitical powers and institutions. To address every possible angle and the consequences, however, requires far deeper national introspection.

The intellectual task for those invested in the movement to democratise the country should involve making any international agreement more bearable to a suffering population. Progressive intellectuals should question the hegemonic policy consensus and put forward alternatives. This strategic approach alone would support the broader democratic transformation of the relationship between State and society.

As for the international actors, it has become increasingly clear to them that the path forward cannot include the current Government led by Gotabaya Rajapaksa and Ranil Wickremesinghe. Meanwhile, the politicians and their respective parties waiting in the wings are focused more on parliamentary manoeuvring. But Sri Lanka is facing a much deeper crisis of institutions, including the disastrous effects of policies promoted even within the Central Bank and Treasury that are styled as politically independent. Only a clearly-defined solution involving redistribution and democratic mobilisation will be able to create a sustainable framework for governing during this overwhelming crisis.

Reckoning with constraints

People in Sri Lanka are facing broken promises and shattered realities, even as they are drowning under a tremendous economic depression. Only those who understand the scale of the crisis, the magnitude of the efforts required to overcome it, and the equally necessary transformation of political economic thinking, will be able to offer a real solution. While the main parties and even extra-parliamentary movements put forward their specific policy proposals, it is critical to frame these in terms of the core need to make sure redistribution comes first.

There are increasingly hard constraints on the ability to propose specific solutions, such as universal welfare and relief. The country confronts the desperate need to repurpose existing resources, to scrape by and to consolidate because of these hard economic limits. Yet the specific way in which a program of recovery is carried out is not the same thing as letting the failed market continue to try and work its dubious magic. Rather there needs to be a new strategic role for the State in addressing the external sector, redistributing wealth, and bringing the question of class to the fore.

Given the plunging depth of the crisis in Sri Lanka and the inherent uncertainty of the long global capitalist downturn, we cannot assume that there is any kind of ready-made macroeconomic or political framework for resolving these issues. The task, then, is to put forward a bold, imaginative set of alternatives that can perform the necessary role of galvanising public consciousness and supporting the organising work required to implement them.

Even as oppositional parties and movements consider the gravity of the moment and prepare for another wave of ceaseless struggle to oust the Rajapaksa regime, they must prioritise efforts to resist imposing any further burdens on the people if an interim government comes into power. Such democratic mobilisation needs to redefine Sri Lanka’s economic policy trajectory if the country is to have real political and economic stability during the difficult years ahead.

(Devaka Gunawardena is an independent researcher who holds a PhD from the University of California, Los Angeles and Ahilan Kadirgamar is a Senior Lecturer, University of Jaffna.)