Redistributive policy

Why Sri Lanka’s economic policy trajectory needs to change

After all these disastrous policy choices, what would be a real course correction that alleviates people’s suffering? – Photo by Ruwan Walpola

The Sri Lankan elite has missed many opportunities to reduce the severity of the current economic crisis. He ignored calls to invest in food production and self-sufficiency even as the crisis grew more apparent. It wasted precious time to drastically reform the balance between imports and exports, which, due to the delay, reduced the country’s bargaining power with external creditors to nothing. During this time, he has oscillated between ignoring the problem or pretending that austerity in the midst of an economic depression is the solution. The political choices at each of these times have been disastrous for our workers.

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

The question of who bears the burden must come to the fore in any discussion of “hard” political choices. Specifically, whatever caretaker government comes to power after the failure of this regime, it must understand that there are clear safeguards. The grassroots movement will prevent any successor government from continuing to impose severe cuts on the masses. They will raise the issue of class. Nodding to creditors’ demands will not suffice to waive the need for redistribution. This struggle will continue, even as organizing and mobilization are undertaken to prepare for a fundamental economic overhaul once elections are possible.

Recent political consequences

We need to re-emphasize the same points we raised earlier about the economic policies of the past few months that purported to offer a course correction, but in fact made a difficult situation worse. These policies, many of which were recommendations of the IMF in its report released in March 2022, have further deepened the economic crisis which has spiraled out of control due to the mismanagement of Gotabaya Rajapaksa’s government.

The sudden floating of the rupee, with no state relief, doubled the cost of many essential workers’ goods. The timing of the rupiah’s float, disregarding the war in Ukraine and rising world prices, even caused some food staples like bread to triple.

The increase in the Central Bank’s policy rate from 6% to 14% on the pretext of fighting inflation is now crippling small producers, for whom the cost of borrowing working capital has more than doubled. The pawning rate for gold jewelery – workers’ emergency liquid assets – has risen from 9% to 25%. This alone risks dispossession on a large scale of people’s assets, which they have accumulated over generations.

The austerity measures that halted public spending amid this crisis are further undermining seasonal income flows from the informal sector. They depend on construction and road works during the off-season from farming, fishing and similar livelihoods.

Market energy pricing has led to a situation where fuel prices, especially gasoline and diesel, have more than tripled. In addition to shortages, these price increases immobilize the entire economy. Kerosene oil, which is used by workers for cooking as well as to irrigate small farms and as fuel for small-scale fishermen’s boats, is provided in small quantities to avoid paying them the subsidy. These price shocks and shortages jeopardize much-needed local food production.

The increase in value added tax from 8% to 12% was a punitive additional cost imposed on everyone, with no consideration of taxing the wealthy instead. Deficit spending was only used to pay the salaries of civil servants. By contrast, there has been little respite for workers involved in the vast informal sector.

Finally, desperate to reach an agreement with the IMF, the government followed the disastrous neoliberal advice to prevent 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 obtain short-term credit from its donors such as Japan and China. And its international financial transactions, including the ability to buy essential goods on credit, have also been severely disrupted.

Tough negotiations

After all these disastrous policy choices, what would be a real course correction that alleviates people’s suffering? The only way out is to think about ways to revive Sri Lanka’s bargaining power by considering a redistributive economic framework. For several months, we have seen what happens when the government blindly follows IMF recommendations. What is urgently needed is a critical debate on the economic dimensions of the country’s debt restructuring, which must be negotiated over time. Although the IMF is only one piece of the puzzle, it exists within a larger global web of competing geopolitical powers and institutions. However, to address all possible angles and consequences requires much deeper national introspection.

The intellectual task of those invested in the country’s democratization movement should be to make any international agreement more bearable for a suffering population. Progressive intellectuals should challenge the hegemonic political consensus and propose alternatives. This strategic approach alone would support the broader democratic transformation of the relationship between state and society.

As for international actors, it has become increasingly clear to them that the way forward cannot include the current government led by Gotabaya Rajapaksa and Ranil Wickremesinghe. Meanwhile, politicians and their respective parties waiting in the wings are more focused on parliamentary maneuvering. But Sri Lanka faces a much deeper crisis of institutions, including the disastrous effects of policies promoted even within the Central Bank and Treasury which are seen as politically independent. Only a clearly defined solution involving redistribution and democratic mobilization can create a lasting framework for governing during this overwhelming crisis.

Count with constraints

The people of Sri Lanka are faced with broken promises and broken realities, even as they drown in a massive economic depression. Only those who understand the scale of the crisis, the scale of the efforts needed to overcome it, and the equally necessary transformation of political economic thinking, will be able to offer a real solution. As mainstream parties and even extra-parliamentary movements present their specific policy proposals, it is essential to frame them according to basic need to ensure that redistribution comes first.

There are growing constraints on the ability to deliver specific solutions, such as universal welfare and assistance. The country faces the desperate need to reallocate existing resources, scrape and consolidate due to these harsh economic limitations. Yet the specific way a recovery program is executed is not the same as letting the failing market keep trying to work its dodgy magic. Rather, there must be a new strategic role for the state in reaching out to the external sector, redistributing wealth and bringing the class question to the fore.

Given the plunging depth of the crisis in Sri Lanka and the inherent uncertainty of the long global capitalist recession, we cannot assume that there is any ready-made macroeconomic or policy framework to address these issues. The task, therefore, is to come up with a set of bold and imaginative alternatives that can play the necessary role of galvanizing public awareness and supporting the organizing work needed to implement them.

Even as opposition parties and movements consider the gravity of the moment and prepare for a new wave of relentless struggle to overthrow the Rajapaksa regime, they must prioritize efforts to resist the imposition of new burdens on the people. if an interim government comes to power. Such democratic mobilization must redefine the trajectory of Sri Lanka’s economic policy if the country is to have real political and economic stability in the difficult years ahead.

(Devaka Gunawardena is an independent researcher with a Ph.D. from the University of California, Los Angeles, and Ahilan Kadirgamar is a senior lecturer at Jaffna University.)