As economy looks up, can Sri Lanka revive its social welfare programme?

Life in Sri Lanka is seemingly back to normal.

No one is lining up at fuel depots for days for just a few litres of petrol. Medicines aren’t in short supply anymore, and no mass protests are taking place against the government.

Two years after Sri Lanka defaulted on its loan repayments amid shortages of foreign exchange and essential items, the South Asian nation of 22 million seems to be clawing its way back to economic stability under a $3 billion International Monetary Fund (IMF) programme.

“There is light at the end of the tunnel. Although it may seem as small as a pinhole at the moment, continued reforms will accelerate passage through the tunnel and allow this light to become bigger and bigger,” wrote IMF officials Krishna Srinivasan and Peter Breuer in a recent op-ed in Sri Lanka’s Sunday Times.

Inflation for February was 5.9 percent, down from 50.6 percent a year ago. In the third quarter of 2023, the economy registered its first expansion in a year and a half. The IMF has projected that the Sri Lankan economy will expand this year, and growth will gather pace next year.

Government spending was twice its revenue when Sri Lanka defaulted in the first half of 2022. Colombo resorted to both note printing and heavy borrowing from domestic markets as foreign financing became scarce.

Inflation soon caught up, and so did interest rates, which more than doubled in a short period of time.

People took to the streets to protest fuel and food shortages as the treasury ran out of dollars to pay for imports. They toppled the government, and the new president immediately sought a $3 billion bailout from the IMF.

As is usually the case, help from the IMF came with strings attached. Colombo had to put its fiscal house in order by raising tax collection and removing energy subsidies.

The IMF has been disbursing funds in small tranches for the last two years as Colombo negotiates debt restructuring deals with key lenders, including China, which is Sri Lanka’s biggest creditor.

While the IMF funding aims to “assure creditors that debt repayment capacity can be restored,” the burden of structural reforms has fallen squarely on the shoulders of ordinary Sri Lankans.

Political economist Asanga Abeyagoonasekera says his field research last month in Sri Lanka revealed a “widening distrust” between the general public and the government due to “multiple policy blunders.”

“Increased taxes under the IMF reforms have burdened lower- and middle-income earners, with nearly 900,000 electricity connections disconnected due to non-payment,” he tells TRT World.

“Overall, poverty has increased by more than 20 percent, with many families going without three meals a day,” adds Abeyagoonasekera, who served as IMF technical adviser to Sri Lanka Governance Diagnostic Report, a structural benchmark under the ongoing loan programme.

According to Colombo-based political researcher Uthpala Wijesuriya, most Sri Lankans resent organisations like the IMF that help politicians “impose hard, harsh austerity” on people who had no role in creating the economic crisis.

Nearly 56 percent of the Sri Lankan population faces multidimensional vulnerability, meaning they are susceptible to harm, risk, or adverse outcomes in different aspects of life.

In other words, half of the Sri Lankan population is currently deprived in at least three out of the 12 indicators that span the critical dimensions of education, health, disaster, and living standards.

“Prices are still high. The monthly salary of an average person is simply not enough to provide for his family. The rupee has stabilised, but it’s far lower in value than it was in 2021,” Wijesuriya tells TRT World.

A high 92 percent literacy rate, free healthcare, and a full electrification rate distinguish Sri Lanka from nearly all regional countries. But the events leading up to the 2022 default and the subsequent reforms that seek to cut government spending have put the future of social welfare programmes at stake.

Dr Ahilan Kadirgamar of the University of Jaffna says global agencies that estimate the current poverty rate in Sri Lanka to be around 30 percent understate the extent of the problem.

“The allocations for health and education have been greatly reduced over the last two successive budgets. The government is also thinking about privatising education. In the health sector, people used to be able to get medicines and medical tests for free in the past. But now they’re told to get their tests and medicines from outside,” he tells TRT World.

He says this deterioration in the quality of education and health services is a direct result of the ongoing IMF programme.

“The conditionalities set by the IMF, what they call benchmarks, push for these kinds of reforms.”