• IMF Board approval and bailout crucial for debt restructuring negotiations
• If multilaterals restructure, it might constrain ability to provide more loans
• State-Owned Enterprise reforms happening, but progress insufficient
• No-brainer that taxes need to go up; more people must be in tax net
• Sri Lankans tend to blame others – China, India, and now the IMF
• Delaying elections will sabotage the reform process

The anticipated International Monetary Fund (IMF) bailout for Sri Lanka is no longer merely a Sri Lankan issue and has become an international issue which requires global discussions and consensus, says Economist Umesh Moramudali, in the backdrop of China’s call for multilateral debt restructuring.

“It has gone beyond Sri Lanka. We see international rivalries going on based on this situation,” noted Moramudali, in an interview with The Sunday Morning, pointing out that on one hand, the IMF felt pressure globally to approve the relief for Sri Lanka, but at the same time it was also concerned about China giving better financing assurances.

“China constantly seems to take this strong stance that the multilaterals also need to restructure. About 20% of Sri Lanka’s debt is to multilaterals. Will this give some sort of cushion to Sri Lanka? Yes. But its feasibility is the issue,” added Moramudali.

In the course of the interview, he also spoke on State-Owned Enterprise (SOE) reforms, the new tax regime, the importance of timely elections, and public consensus for reforms. 

All eyes are on the IMF this month, with the Government expecting the long-awaited bailout package. Do you see it happening or will IMF relief get further delayed?

It is very difficult to say at this point because currently the IMF requires assurances from major creditors and we have to wait and see whether the financing assurances provided by China are sufficient. 

China’s Exim Bank has said it is willing to be in arrears for 2022 to 2023. The IMF’s policy has been to give board approval based on the Lending Into Official Arrears (LIOA) policy. As I said, the Exim Bank of China had informed that it was willing to be in arrears. One would argue that this should be sufficient for the IMF Board to approve Sri Lanka’s bailout package. Right now, we are not talking about 2022 and 2023 – we are talking about 2024 as well and 2022 is already over. It all really depends on whether the IMF accepts what the Exim Bank has said as sufficient.

As many people have figured out now, this is no longer merely a Sri Lankan issue – it has gone beyond Sri Lanka. We see international rivalries going on based on this situation. On one hand, the IMF feels pressure globally to approve the relief for Sri Lanka, but at the same time it is also concerned about China giving better financing assurances than it has given now, because obviously countries like the US and India will raise concerns.

If IMF assistance does not come through this month, what will that mean for Sri Lanka?

It would mean many things; we can only speculate at this moment. It could have an impact on the country’s dollar reserves. 

The IMF money is not a lot because it comes in tranches, but it will act as a signal for multilateral creditors and others to lend to Sri Lanka. However, we also see some form of bridging finance being provided to Sri Lanka. For example, the International Finance Corporation (IFC) has announced that it would provide a $ 400 million swap to a few Sri Lankan banks to finance imports. 

If the IMF deal comes through, it will see global economic actors having more confidence in the Sri Lankan economy, confidence that Sri Lanka is now moving in a better direction, which will make things easier. Currently we are paying a premium to import some goods because of the economic uncertainties and we may have to continue paying a premium if the IMF bailout package is not approved. 

IMF Board approval, and thereby receiving the bailout package, is crucial for debt restructuring negotiations as well. The longer the IMF Board approval is delayed, it could slow down the debt restructuring process. Debt restructuring is of course a separate process to the IMF bailout package, but it is very much influenced by Sri Lanka starting an IMF programme.

How do you view China’s stance on multilateral debt restructuring?

China constantly seems to take this strong stance that the multilaterals also need to restructure. About 20% of Sri Lanka’s debt is to multilaterals. Will this give some sort of cushion to Sri Lanka? Yes. But its feasibility is the issue. 

The global argument against this is that multilaterals will be providing new funds – not only to Sri Lanka but also to many other countries in the debt restructuring process – and as a result of that, it doesn’t make sense for multilaterals to restructure their loans.

The problem is, if multilaterals do restructure, it might constrain their ability to provide more loans to developing countries, which they really require right now. It’s really difficult to go to the international capital markets and borrow; you can’t think of issuing international sovereign bonds. 

This is now an international issue which requires global discussions and consensus. 

IMF bailout aside, do you see this Government taking the necessary steps to implement the SOE reforms we need so badly?

Some steps, yes. We see some things happening. We see committees being appointed to carry out reforms, we see some regulations being changed, we see tax changes, so on and so forth, but we also see these things happening more or less as a part of the IMF requirements.

Right now I wouldn’t say progress is sufficient but I wouldn’t say there is no progress either; there is some progress.

How do you view the current tax regime, especially in the backdrop of the protests by trade unions? Has the Government gone far enough or not?

Firstly, we need more taxes. We have one of the lowest tax to GDP ratios in the world. Our tax ratio has constantly come down. It’s a no-brainer that the taxes need to go up. On one hand, tax rates need to go up and on the other hand, we also need to drag more people into the tax net. 

However, how you do this is somewhat problematic and, whether we like it or not, all these reforms are part of the political process. We are talking about economic variables, but the process is highly political. That’s the bitter reality; you also have to pay attention to that. 

There is also a social element: because taxes and interest rates have been low and because this country had an overvalued exchange rate, all of these things bundled together have resulted in a middle class that has got used to certain consumption patterns.

Whether they have overspent or not is a secondary matter. I personally think that the middle class in this country has spent more than it should, but right now there is nothing we can do about it. However, there are consequences to their consumption patterns, which have to be dealt with.

The protests largely derive from the professional groups. The way I see it, the idea of tax increase is not something we can relax. I don’t think we should change the minimum tax threshold. It’s important that people also feel that they need to pay taxes. I believe that a person who earns Rs. 100,000 can pay taxes. That person is not paying Rs. 20,000 as tax. 

For example, a person who earns Rs. 150,000 per month would pay approximately Rs. 3,500 as tax, which is bearable if expenses are adjusted. In a crisis like this, the middle class also needs to take responsibility.

The tax increase placed a significant burden on those who earn Rs. 250,000/350,000 and so on. Most of the protests come from this group. The way I see it, you need to revise the tax rates – not reduce them significantly – and change some tax slabs. The problem is with people who earn Rs. 350,000 or so having to pay Rs. 50,000/60,000/70,000 as tax. Due to their consumption patterns, including loans, they now find it difficult to make ends meet. 

To address this issue, some adjustment has to come in, but the reality is that such adjustments cannot be large given the very low level of revenue and requirement to achieve primary surplus. There is also a need for private debt restructuring. Banks need to facilitate restructuring of loans obtained by people who are affected by tax increases. 

I see some suggestions about bringing down the highest tax rate to 24%. I don’t see any reason why it should happen. The maximum tax rate of 36% should remain, because that is how we can increase direct tax revenue.

Do you feel that the politicians and the people of this country need an attitude change for Sri Lanka to do what is necessary to emerge from this crisis? Without waiting for the Government to solve all the problems, do the people also need to change their expectations of handouts and start working together to recover?

Yes, it is very important. One of the reasons we are in this position is because of significant moral hazard. We tend to blame others. At one point we blame China, at another we blame India, and I am sure we are now in the process of blaming the IMF. 

What we have to understand is that this is our responsibility too. Yes, politicians did make very bad decisions, but at the same time the public has to take responsibility as well, especially in terms of consumption patterns, loans, etc. 

It’s the same problem when it comes to taxation because we haven’t had a pro-tax attitude. We need to at least acknowledge that we need to pay tax. If we are to get out of this mess, we need to pay tax and we need to be much more responsible in our consumption.

The other side is political. You still see politicians not giving enough incentives for the people to make these compromises. Reforms are a political process. These reforms are not popular and they will never be. Austerity measures, SOE reforms, increasing taxes, taking away subsidies – none of these are popular. 

It’s very easy for economists like us to say this has to be done, but the reality is that it requires public consensus and significant public trust in the State to be done successfully. Politicians need to act in such a way that the public believes that some compromises and efforts are being made by the politicians to get out of this crisis. In the absence of it, people do not feel like supporting the reforms. 

You cannot carry out reforms in a sustainable manner if you don’t have public consensus. What the Government is doing right now, in my view, is quite the opposite. People have a democratic right to elections and when elections get delayed like this, when there is no medicine in hospitals, when essential needs are not met, then people question why they are paying more taxes. Such sentiments will actually sabotage the reform process and we are in that danger because this Government does not have a public mandate.

This Government which was elected to reduce taxes has now increased taxes. This is why elections are necessary, because then the people will believe that they get to have their say. Delaying elections will actually sabotage the reform process. I don’t know whether the Government really understands the gravity of it. Trying to carry out reforms while ignoring public demands or public sentiments will only increase the risk of reforms failing.