Practicalities of change

In the turbulent wake of the passing of the 19A, Finance Minister Ravi Karunanayake made a special announcement last week to the effect that Sri Lanka had entered into talks with the Asian Development Bank (ADB) to secure a line of credit worth $ 1.2 billion, to be channelled toward supporting the ‘Yahapalanaya’ development agenda.

During his announcement, Karunanayake placed strong emphasis on the fact that ADB funding was reportedly being considered not on the basis of any request by the Sri Lankan Government but instead, based on the findings of an independent review of the national economy carried out by the ADB.

Nevertheless, it remains to be seen whether such funding will in fact come through and if it does, on what basis such funding would be allocated will also be a subject of interest. Take for the instance the International Monetary Fund’s (IMF) $ 2.6 billion that was provided to Sri Lanka at the height of military operations in 2009 – this too was provided across multiple tranches over an extended period of time and following numerous reviews and approvals by the IMF.

Therefore the one fact that should be safe to assume about any potential lines of credit from the ADB would be that $ 1.2 billion will not simply materialise in our national coffers but instead will be transferred over a period of time and, most likely, will be rigidly allocated to development specific initiatives.

It may also prove useful to take Karunanayake’s announcement about ADB funding with a certain amount of healthy scepticism considering that similarly enthusiastic statements were made about the possibility of the IMF and World Bank extending support to Sri Lanka to the tune of $ 4 billion in order to restructure expensive debt contracted under the previous regime. 

Considering that such funding ultimately failed to crystallise due to the IMF policy of only extending support to a country’s balance of payments, it would be prudent to await greater detail on the proposed $ 1.2 billion before assuming that it will help to pull the country out of its current fiscal challenges. It is also notable that the IMF’s most recent review of the Sri Lankan economy warned of rising risks, particularly with regard to the deficit target which the IMF cautioned had placed too great a reliance on one-off revenue measures – an undoubtedly cautious view which was echoed by the ADB when it downgraded its projection for Sri Lankan economic growth from 7.5% down to 7% based on perceived risks of instability. 

Reform requires restructuring and restructuring requires funding. The present regime has taken great pains to present itself as being completely different from the previous one both in terms of civil and political outcomes but perhaps more importantly, in terms of fiscal responsibility as well. 

Upon securing a stable transition from the Rajapaksa regime, the first order of the day was to provide relief for the people. One of the key messages to come out of the launching of the Interim Budget 2015 was that extraordinary measures would be required to “clear the dead past.” 

The securing of donor funding to help the Sri Lankan economic project on its way is therefore a welcome development but as the IMF’s Directors urged in their most recent statement, it is imperative that “more ambitious measures” are adopted to contain expenditure while protecting priority social protections and high-value infrastructure investment.