Ranil Wickremesinghe’s Contribution to Securing an IMF Loan for Sri Lanka

Sri Lankans are engaged in a heated debate and discussion about Yeah President Ranil Wickremesinghe was a factor in his country obtaining IMF assistance. Veteran DBS columnist Jeyaraj has he claimed that the “IMF program was made possible in large part due to the tireless efforts of the president.” On the other hand, the Sri Lankan economist Umesh Moramudali saying that “Ranil does not own the IMF negotiations”, and that “the IMF negotiates with the government, not with Ranil in [an] on an individual basis.” Therefore, according to Moramudali, the fact that Wickremesinghe was president of Sri Lanka did not sway the IMF decision in favor of Colombo.

On March 20, the IMF approved a $3 billion Expanded Facility Fund (EFF) to support Sri Lanka amid its economic crisis. The approval is expected to pave the way for other financial institutions to extend their support to the bankrupt South Asian country.

The IMF links financial assistance to a country with policy reform, a condition that typically imposes both political and economic changes on the recipient nation. He logic behind IMF conditionality is multiple. It is supposed to prevent moral hazard for governments that receive loans. These conditions allow the IMF to monitor the behavior of recipient states and supposedly promote best practices and good governance.

Sri Lanka has been in the IMF 16 times before; five of them since 2000. The full amount of the IMF loan was not disbursed six times because Sri Lanka did not fully comply with the conditions of the loans. This included the previous EFF in 2016, when conditions imposed by the IMF put additional pressure on the national economy. There has been much skepticism about Sri Lanka’s accession to the more strict IMF conditions this time.

Despite the prevailing skepticism among journalists and economists, the IMF is very pleased with the progress Sri Lanka is making on the commitments it made as part of the IMF’s four-year EFF to the country.

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An IMF delegation, which was in Colombo recently to assess the deal’s progress, is optimistic. Director of the Asia and Pacific Department of the IMF Krishna Srinivasan said a press conference in Colombo on May 15 that the Sri Lankan government has shown “commitment to the reform effort” that is part of the agreement with the IMF. He added that the “authorities are making good faith efforts to negotiate with all creditors, both private and official.”

Peter Breuer, IMF Principal Chief of Mission for the Sri Lanka, Asia and Pacific Department, said that “we see things developing more or less according to expectations.”

Srinivasan added that Sri Lanka had to complete a series of prior actions before the IMF would approve its bailout package. These actions were extensive and required a significant commitment on the part of the Sri Lankan government.

Among these are cost-reflective of a series of goods and services that the government had subsidized for decades. Sarwat Jahan, IMF Resident Representative in Sri Lanka saying the Ceylon Petroleum Corporation (CPC) and the Ceylon Electricity Board (CEB) would have to recover their costs until the end of the IMF programme.

The government met all these requirements, which shows that they are serious about implementing the reforms needed to address the country’s economic crisis, Srinivasan said.

The conditions attached to IMF loans often involve actions aimed at suspending subsidies to industry, preventing exchange rate manipulation, adjusting budget priorities, and regulating wage levels. The leaders, facing various political constraints, differ in their willingness to strike a deal with the IMF and make compromises in these four areas.

Taking into account that IMF loan conditionality agreements generally imply the implementation of fiscal austerity measures, the leaders with the greatest winning coalitions will find more challenges while trying to negotiate an agreement for IMF financing.

On the other hand, when a regime maintains power through a tighter network of closely connected supporters, it is easier for it to strike a deal with the IMF.

Miles Kahler, Senior Fellow for Global Governance at the Council on Foreign Relations in Washington, DC, in the chapter of his 1993 book entitled “Negotiating with the IMF: Two-Tier Strategies and Developing Countries,” contours two key aspects of domestic politics that influence the loan negotiation process: first, the degree to which a technocratic elite is insulated from economic interests, and second, the frequency with which elites confront political challenges such as elections.

Another factor that can impede the formation of a loan agreement is the presence of multiple veto actors, such as the separation of powers or the existence of multiparty government coalitions.

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Kahler says that when a country has a larger number of veto players capable of obstructing a loan deal, the scope for domestic political consensus becomes narrower, leading to higher bargaining costs for the IMF. Typically, the veto staker count is determined by assessing the number of parties in a governing coalition in countries where there is genuine political competition.

This explains why it was extremely difficult for former president Gotabaya Rajapaksa, who came to power through a coalition of populism and with the support of a range of interest groups, from big business to professional associations, to enter into negotiations with the IMF.

On the other hand, Wickremesinghe is the leader of the United National Party, a political party that obtained around 250,000 votes from 15 million eligible voters. He has an MP in Parliament, Wajira Abeywardana, who is a staunch loyalist. Wickremesinghe is backed in parliament by the Sri Lankan Podujana Peramuna (SLPP), whose parliamentarians depend on him for their political survival and would vote for any legislation he proposes.

Sri Lankan legislators are entitled to various benefits at the end of the full five-year term and most SLPP MPs backing Wickremesinghe are adamant about completing their terms. Wickremesinghe has also indicated that there will be no elections until the economy stabilizes and the first elections Sri Lankans see are likely to be presidential elections, probably in 2024.

Therefore, Wickremesinghe can fully implement the IMF recommendations, as he does not answer to any political coalition or interest group. Nor is he facing an election. Wickremesinghe’s personal ideology also aligns with that of the IMF. It is unlikely that the IMF ignored these factors when the loan was approved and when they assessed whether Sri Lanka would adhere to IMF conditions.

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