Abstract:
The IMF’s insistence on government spending cuts and tax increases will help achieve financial
sustainability goals, on the hand, it threatens to alienate the regime from society and thus create
the sustainability issues of the government itself. Sri Lanka’s livelihood subsidy policy can be
traced back to the colonial period, when the colonial government offered subsidy to peasants
who were deprived of paddy estate. This compensation arrangement later became one of the
main sources of legitimacy for the regime. After independence, the dynamics of party politics
and ethnic competition reinforced the government’s adherence to subsidy policy instruments.
The current government has neither political authority or financial resources to initiate meaningful
structural reforms on subsidy dependence. It is also futile for the government to attempt to
reverse the constitutional amendments for presidential system or coerce the IMF to cede on its
additional terms in the short term. Instead, it should focus on economic development, and try
to foster incremental reforms by relaxing government control and granting certain autonomy
to ethnic minorities and impoverished farmers. In this way, the government can be relieved
of much of its burdens on defense and subsidy, and accrue market vigor to attract foreign investments.
In the mean time, the government should also adjust higher education for future
industrial development, so as to enhance the competitiveness of its labor force and generate
more tax revenues for the government.
