by Vishvanath
No government ever wants to undertake anything that increases the cost of living in an election year. As an avalanche is to a mountaineer, so is the political fallout of a massive tax increase to a regime preparing itself for an electoral contest. But the current SLPP-UNP administration has been left with no alternative but to raise VAT from 15% to 18% and expand its application to cover almost all goods and services with effect from Jan. 01 2024 to keep the ongoing IMF programme on track. Politically speaking, it has put all its eggs in the IMF bailout basket.
The government has not been able to secure the second tranche of the IMF loan because it has not met its revenue targets, which are in fact very ambitious. Needless to say, it is desperate for IMF assistance, which means much more than dollars to a bankrupt nation; an IMF-backed economic recovery programme goes a long way towards helping a country have its external debt restructured and win back investor confidence. Why the government is so desperate and taking huge political risks to retain IMF help is understandable.
When VAT is increased with more goods and services being subjected to it, from the beginning of 2024, the general price level will go into the stratosphere, making the cost of living even more unbearable. Indirect taxes such as VAT affect everyone, unlike personal taxes that professionals are vehemently protesting against.
The scheduled replacement of the current 7.5% PAL (Ports and Airports Development Levy) on fuel with an 18% VAT will lead to a huge increase in the cost of passenger and cargo transportation among other things. The government will have some control over private bus owners, but others such as school vehicle and taxi operators and haulers are likely to resort to making the most of the situation with disproportionate fare and freight hikes. Besides, those who use private vehicles will also be affected by fuel price hikes. Fuel price increases lead to an increase in the thermal power generation and drive electricity tariffs up, causing the National Water Supply and Drainage Board to follow suit. Economic woes will worsen across the board owing to the VAT increase on the horizon. This is a disconcerting proposition for not only the public but also the incumbent government facing a presidential election as well as parliamentary polls in the latter part of the next year.
President Ranil Wickremesinghe, who is also the Minister of Finance, who is directly involved in negotiations with the IMF and boldly carries out unpopular yet essential economic decisions, must be in a dilemma. Speculation is rife that he will opt for a presidential election before the next parliamentary polls. In any case, his party, the UNP will have to face elections next year. The SLPP is trying to dissociate itself from the unpopular measures being adopted to revive the economy; Namal Rajapaksa did not vote for the second reading of the 2024 budget, claiming that it did not grant any relief to the public.
The entire ruling coalition finds itself in a rock and a hard place. The IMF conditions, however sensible and helpful they may be economically, entails a huge political cost for the governments of the debtor nations. One of the ways the current dispensation can think of improving its chances of winning an election is to secure a reprieve from the IMF in the form of the easing of some of the constricting loan conditions so that the people’s economic woes will not worsen at least temporarily. But the IMF is not likely to consider such a request because it is blind to the political consequences of its programmes, which are based on sound economics. It is being speculated in some quarters that the government might leave the IMF programme after securing a few tranches of the scheduled loan. Sri Lanka has a history of leaving IMF programmes halfway through after achieving its short-term objectives. It is said to have done so 16 times. So, this time around, the IMF is not likely to leave any room for tricks to be played on it again. Most of all, the economic fallout of the VAT increase on the cards is likely to lead to political upheavals as has been the experience of other countries that have secured IMF assistance on stringent conditions. If protests erupt countrywide, the government will not be equal to the task of containing them. Worse, protests tend to snowball the way they did last year.
It may be argued that the current situation is not as bad as the one last year, but agitations are like fire; they usually commence as small demonstrations and then intensify and spread, cutting a vast swathe through a country like a storm or a bushfire. Whoever would have thought that a wayside protest at Mirihana early last year would develop into a popular uprising which came to be dubbed ‘Aragalaya’ and cause the ouster of a popularly-elected Executive President? So, the SLPP-UNP administration will find itself in an unenviable position come 2024. However, 2024 is likely to be a tough year for the Opposition as well. The SJB keeps flaying the government for meeting the IMF conditions subserviently. But it has not presented an alternative recovery programme. It has only said it will renegotiate the IMF programme if it forms the next government. The question is whether the IMF is willing to do so. The governments of developing countries in financial distress have to follow the IMF dictates and that does not happen the other way around. Sri Lankans are better informed today thanks to increasing accessibility to information. They are aware of the experience of other nations and the ground reality.
The Opposition in Argentina criticised the IMF programme a few years ago, and captured power in 2019 by campaigning against it, but it failed to revive the ailing economy, and protests continued. Sri Lanka’s situation is far worse; it is struggling to come out of bankruptcy. Thus, the SJB, the biggest Opposition party, will have a hard time trying to convince the voting public that it will be able to turn the economy around and grant them relief instead of hurting them economically. After all, the SJB has lambasted the government for the inordinate delay in seeking IMF assistance. The JVP flays both the government and the SJB, claiming that it alone can help the country come out of the current economic crisis and usher in national progress. But the fact that it lacks experience in statecraft and economic management is bound to go against it.
The people have realized that they made a mistake by reposing trust in Gotabaya Rajapaksa, a political greenhorn, and electing him President. Moreover, the JVP keeps reaffirming its commitment to its brand of Marxism, which has long ceased to influence the world economy. How will it reconcile its Marxist agenda with the current global economic reality? Some of its seniors have indicated that they are not averse to open market economic policies, but the JVP has not made any official statement to that effect. Such ideological ambiguities and contradictions will stand in the way of its efforts to obtain popular support for another experiment. The Sri Lankan public will have to make wise decisions when they vote at future elections.
They have been blaming the governments they elected for their predicament. They will have to make the right choice next time if they are not to regret again. Will they act rationally? Or, will any political alternative be available for them? Will they have to settle for the best out of a bad lot, and opt for another experiment? Will some factors other than economic considerations sway the public? It is too early to attempt answers to such questions. Politics like cricket is known for glorious uncertainties. But one thing is clear; 2024 will be a tough year for both the Sri Lankan public and the government leaders who are fighting for survival and hoping for re-election.
