On March 22 Sri Lanka received US$ 330 million as the first tranche of the International Monetary Fund (IMF) relief. The price of essentials has seen a drop in the market since including fuel, bus fares and even milk powder. Did this price decrease take place due to the IMF aid received and if so will this phenomenon be short-lived? The Sunday Observer spoke to several economists to elicit their opinion on the current situation.
Govt initiatives led to price reductions
Ven. Prof. Wijitapure Wimalarathana Thera, former Head of the Department of Economics at the University of Colombo and President of the Sri Lanka Economists Association
“While the IMF aid is itself not significant, it helped investors, creditors and businessmen form a positive image of Sri Lanka. When the rupee is strengthened prices invariably drop. Those sending foreign remittances are also now becoming confident about Sri Lanka due to the strengthening of the rupee. Tourist numbers are also increasing. The crude oil price drop in the world also led to a price decrease of other goods.
But there is a culture of robbing customers blind in Sri Lanka. Though some have reduced prices, others have not and are hoarding goods. We must become culturally developed to stop this. The Consumer Affairs Authority (CAA) cannot be everywhere and look into everything. Creating a developed culture is the only way.”
All this is due to temporary debt relief
Senior Prof. Sirimal Abeyratne, Department of Economics, University of Colombo
“IMF aid is a temporary relief and has opened doors to obtain other credit facilities. We can see the prices of goods and exchange rates dropping but all this is temporary. This will however support us to prevent the country from falling into a deeper abyss. We must come out of foreign debt. It should be aimed at reducing foreign debt to 4.4 percent of the Gross Domestic Product (GDP) in the future. We must attract foreign investments and improve exports.
We will have to reduce our debt load to obtain the next IMF tranche as well as increase our foreign reserves while bridging the Budget Deficit as well. Last year India received foreign investments up to US$ 82 billion. But the amount that came to our country is less than US$ 1 billion. Progress in export promotion is the best indicator of overall development.”
IMF funds should be used for investments
Prof. Navaratne Banda, Head of the Department of Economics, University of Kelaniya
“We must keep in mind that IMF Extended Fund Facility (EFF) aid is a loan. We have spent US$ 121 million from that to repay the Indian Credit Line (ICL). As an economist, I am not pleased with servicing debt through more debt. We should have retained it for investments and paid the debt through those returns. We must develop our export sector through this aid such as vehicle assembly, rubber, coir and cocoa.
The fuel price dropped due to the depreciation of the dollar. Though prices of goods have dropped, someday we will have to repay our debt. We must develop the country and make it a country that repays its debts. The Government must have a proper plan for this. If not, this debt will only get added to the current tax burden.
No discernible link between IMF aid and price reductions
Prof. Wasantha Athukorala, Department of Economics and Statistics, University of Peradeniya
“I do not see a significant connection between the IMF loan and the decrease in commodity prices in Sri Lanka. Several main factors influenced the decrease in commodity prices in Sri Lanka. Agriculture production increased in the last season and the harvest is now making its way to the market. There was some kind of fluctuation in the foreign exchange rate. Due to the strengthening of the rupee, the prices of imported goods including oil have decreased, thus the costs in the transport sector have decreased. On the other hand, in the last two or three months, the price of crude oil and gas in the world market has decreased greatly.
It also led to a decrease in oil prices. It is not possible to say that the price of goods has gone down due to IMF relief. But the amount received was enough to increase the quantum of Sri Lanka’s foreign reserves and control the country’s expenses. That is somewhat of a relief.
If the rupee has strengthened due to this aid, it is an unstable strengthening. IMF funds must be utilised to develop the economy if it is to be correctly utilised. Right now, we cannot see such a plan. This aid program has many targets. For that, the Government should create a program that will boost the local economy. We must proceed with IMF conditions to receive the next tranche. Under this debt restructuring process, more conditions may come forward from the creditors. They are more likely to interfere in our economy by attempting to impose strict measures. Therein lies the challenge.”
People received immediate relief
Dr. Priyanga Dunusinghe, Senior Lecturer, Economics Faculty, University of Colombo
“The IMF loan has led to confidence in our economy. The rupee has appreciated.
The Government decided to pass on that advantage to the people immediately. This is a positive development. It is good that the authorities gave some relief to the public. Now the people will rise up against the destructive acts of certain trade unions. The people have received the benefit of the reduction of crude oil prices. People expect short-term benefits. Public trust is important when dealing with the IMF again.
Exploitation by traders was one of the factors that led to price hikes in the retail market. They raised some prices artificially, taking advantage of uncertain economic conditions.
But now prices are falling due to competition. The present trend of price reductions is not temporary. When the import restrictions are lifted soon, there will be no room for price hikes and hoarding of goods. There should be a price formula for all goods, not just fuel.
New laws and regulatory agencies should be introduced for this purpose.”