ECONOMYNEXT – Presenting a not-overly-optimistic outlook on Sri Lanka’s latest International Monetary Fund (IMF) programme, Human Rights Watch has called for policies that don’t further erode economic and social rights, days after Amnesty International expressed similar sentiments.

In a statement titled ​​’Sri Lanka: IMF Loan Risks Eroding Rights’, HRW said on March 30 that the IMF could use findings of the international lender’s governance diagnostic for the island nation in terms of anti-corruption measures to “set conditions later in the loan programme”.

HRW said that Sri Lanka should ensure that anti-corruption reforms provide accountability.

“Official corruption and tax rules that benefitted the wealthiest were key drivers of Sri Lanka’s economic crisis, for which Sri Lankans struggling to make ends meet should not have to carry the burden,” HRW South Asia director Meenakshi Ganguly was quoted as saying in the statement.

“The government should recognise that the public deserves real accountability, whether it’s for past war crimes or ongoing misgovernance and repression of critics,” she said.

Experts have blamed Sri Lanka’s latest currency crisis, the worst in decades, on several factors including excess money printing, misplaced subsidies that don’t go to the deserving, gross mismanagement and ill-considered state participation in the economy at a colossal cost to the state coffers.

Acknowledging that the IMF loan is intended to provide the country with a lifeline while addressing deep-seated problems that contributed to the crisis, HRW said that under international law, governments and financial institutions have an obligation to respond to economic crises in a way that advances rather than further jeopardises human rights, and should avoid pursuing policies that reduce low-income people’s access to essential goods and services.

“Currently, the IMF programme’s anti-corruption measures are centred on the government passing legislation in line with the United Nations Convention Against Corruption and the IMF carrying out a governance diagnostic that assesses Sri Lanka’s strengths and weaknesses in six areas, including the rule of law and fiscal governance. The conclusions could be used to set conditions later in the loan programme,” the IMF said.

For the analysis to be effective, civil society should play a prominent role, the international nongovernmental organisation said.

“Subsequent anti-corruption reforms should ensure that the government enforces its rules and holds corrupt officials and private businesspeople to account, including for past malfeasance. These efforts should include recovering stolen assets, imposing back pay and penalties for tax evasion, and stemming illicit financial flows out of the country,” it said.

The IMFprogramme’s focus on increasing government revenues, rather than reducing public spending as a percentage of Gross Domestic Product (GDP), will better protect rights, the organisation noted.

“When the crisis began, Sri Lanka had among the world’s lowest tax-to-GDP ratios at 7.3 percent. That ratio is expected to nearly double to 14 percent of GDP. However, while some of the new measures are designed to increase taxes on the wealthy and eliminate tax exemptions that benefit them, the heavy reliance on value-added taxes can worsen the cost-of-living crisis,” it said.

Sri Lanka’s trade unions affiliated with leftist parties and a number of professional associations have demanded that the government reverse an IMF-backed progressive income tax hike on the country’s highest earners. The government has so far not given in to the demand but has said more acceptable tax rates can be discussed in six months’ time when the IMF deal comes up for review.

“The programme reduces the threshold for taxing annual income to 1.2 million rupees (3,694 US dollars), a change that some have protested as burdening families who are already struggling to realise their rights. The government should publish data on the percentage of the population that is subject to income taxes under this change. It should also consider advancing the introduction of taxes on property, gifts, and inheritance, which the programme mandates by 2025,” the HRW statement said.

“The government has already increased corporate tax rates and removed all sector-specific tax exemptions, according to the IMF staff report. But most new tax revenue will come from value-added taxes (VAT), which were raised from 8 to 12 percent in May 2022 and again to 15 percent in September. Basic food items remain exempt from VAT, but the government committed to VAT reform by 2024 that would remove “almost all” product-specific exemptions,” it added.

HRW claimed that the programme includes other measures that could harm low-income people.

“Public services are central to delivering rights and are an important source of employment. The programme calls for keeping any increase in public wages to less than inflation, effectively reducing real salaries, and reducing total spending on wages from 5 to 3.6 percent of GDP. It also eliminates subsidies for both fuel and electricity and imposes an excise tax on fuel, but does not ensure that these critical measures are carried out in a way that fulfills rather than erodes rights. To protect rights when removing subsidies and introducing taxes for fossil fuels, the government should adequately invest in social protection, the use of renewable energy sources, and other measures to move toward a rights-aligned economy.”

HRW also questioned the adequacy of a social spending floor prescribed by the IMF that would “gradually raise” spending on four cash transfer programmes to help cushion the potential impact of macroeconomic adjustment on the poor and vulnerable groups.

“Recognising the pervasive flaws in the country’s targeted cash transfer programmes, it also mandates overhauling eligibility criteria in partnership with the World Bank to make them ‘based on objective and verifiable characteristics of households,’ and notes the government is working with the World Bank on a new electronic registry for selecting beneficiaries.

“While the floor brings up total spending on these programs to 0.6 percent of GDP, it is set at far less than developing countries’ average spending on safety nets, which is 1.6 percent.

“Furthermore, the insistence on targeting benefits based on eligibility criteria also risks continuing to exclude people who are unable to access goods and services essential for an adequate standard of living. The details of the new eligibility criteria and electronic registry have not been made public, but research has shown pervasive problems with targeting benefits, including high error and exclusion rates.”

For example, a proposal to use electricity consumption as a proxy measure – to overcome the lack of data on household income as well as the risk of corruption in selecting beneficiaries – would leave out about 35 percent of the bottom half of the population, HRW said. Because current beneficiaries who are ineligible under the new criteria would be removed by January 2024, this could mean people losing benefits they are currently receiving, it added.

“Contrary to this approach, the IMF’s technical note on social safety nets advises that in countries with “low administrative capacity” efforts should focus on enhancing tax capacity to ‘claw back’ benefits from high-income households, rather than lowering benefits or excluding low-income beneficiaries.

“When half of Sri Lankan families are buying food on credit, it’s not the time to experiment with fixing chronic and pervasive problems with targeted cash transfer programmes,” said Ganguly. “Instead of investing precious funds in new registries, the government’s focus should be on building a tax system that makes sure the wealthy pay their fair share.”

The HRW’s less than optimistic outlook on what is now Sri Lanka’s 17th IMF programme came two days after a visiting top Amnesty International official said he planned to meet IMF representatives in Colombo to discuss the socioeconomic implications of the deal.

Speaking to EconomyNext on the sidelines of Amnesty’s South Asia regional launch of its State of Human Rights Report for 2022/2023 in Colombo, Muchena said on Tuesday March 29 that he would be meeting IMF officials this week to better understand the 2.9 billion dollar extended fund facility (EFF).

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(Colombo/Mar30/2023)