The Sri Lankan economy’s example
January 21, 2023 04:19 PM
It is misconceived, if any government accepts the IMF conditionalities the inflation swells. Recent Sri Lankan example is distinctive to such proclamations. There the government believed that with IMF conditions the inflation will go up from 25% to 35%, yet it happened other way round. The IMF program was not consented, and with the default the inflation surged to 60%. Besides there is swear shortage of daily consumables alongside food items.
It is sad to relate that Pakistan is also gradually inching towards same situation. The government is trying to handle the political economy to insulate from public anger. May Allah keep us safe, this situation is turning out to be reflection of another Sri-Lanka situation.
Unfortunately, similar discussions in Sri Lanka were taking place before the default. There were discussions with IMF but their govt was not ready to opt for IMF conditions. In the meantime, the Sri Lankan monthly trade deficit grew to almost $3 billion. The foreign exchange reserves were depleted fast. Sri Lanka entered IMF program for 16 times in its history.
It’s the same what is happening to Pakistan at the moment. Sri Lanka‘s govt was busy in cutting the taxes to get popularity in the masses, on the other hand the economic experts were pressing the govt to choose for strict economic measures as it desperately required IMF program. The Govt was adamant that as in the past, the friendly countries will not let it default, this was their conviction that it would be better to rely on friendly countries instead of taking tough decisions and becoming unpopular. But as an aftermath to coronavirus and bad tea crop the situation further deteriorated and foreign reserves kept depleting. Internationally downgrading in the credit ratings continued, the chances of securing any loans or support funds vanished. The imports were curbed, administrative measures were actuated to stop the dollar flight out of the country, the parity was artificially engineered, the interbank and open market rates widened and the dollar surged to sky-high in the black market.
The foreign remittances fell drastically because of market rate difference and the non-banking channels were used as happening in Pakistan. Finally, Sri Lanka completely ran out of Foreign exchange reserves and defaulted on its obligations towards foreign commitments. In the end the govt and State Bank both acknowledged the mistake of not entering the IMF program, had they opted to do so they would have averted this situation. Sri Lanka didn’t agree to conditionalities because they thought that already the inflation is at 18%, if they agree to IMF the inflation may reach 25-30%. Eventually Sri Lanka defaulted and the inflation surged to over 60%. As a result, the rulers had to run out of the country. The default emerged 8 months back but the country is still struggling to stabilise in spite of all out efforts. IMF is not acceding to support unless Siri Lanka gets the restructuring by friendly countries. Additionally, IMF is also demanding to restructure the domestic loans.
The conditions in Sri Lanka are bad, public is in bad shape and seemingly there is no possibility of any betterment. It is a typical example of handling the political economy instead of rational economy. We must learn from their experience and the results of such policies which are to appease the masses and retain populist support by ignoring and running away from the reality.
Thus the rationality demands:
1. Unpeg the Dollar, let the market determine the real exchange rate. There will certainly be inflationary impact but it will settle down with prudent economic policies.
2. Get IMF program activated ASAP. This will allow number of multilateral, bilateral, FDIs, short and long terms support to inflow. This will help to build foreign exchange reserves and will take the pressure off from Rupee in the market.
Simultaneously it’s equally important to educate the public by holding seminars and talk shows about the current state of financial affairs. While the major global economies are stranded/struggling, Pakistan is also likely to be affected. However, if in the general public some awareness and responsiveness is fostered by political players by turning out as role models, we can confront and succeed in dealing with these challenging times.