Strengthening the Social Safety Net is Critical: IMF Pronounces on First Review of Sri Lanka’s Extended Fund Facility Arrangement

 By Dr. Hemesiri Kotagama

On October 19, 2023, the International Monetary Fund (IMF) reached a staff-level agreement after conducting the first review of Sri Lanka’s extended fund facility arrangement. The release of the second tranche of the facility now awaits a decision from the IMF’s Executive Board. The staff-level agreement, accessible (https://www.imf.org/en/News/Articles/2023/10/19/pr23357-sri-lanka-imf-reaches-sla-on-the-review-of-sri-lanka-extended-fund-facility-arrangement), emphasizes the imperative need for further fortification of the social safety net to safeguard the welfare of the poor and vulnerable. IMF staff-level agreement says:

“Further strengthening the social safety net remains critical to protect the poor and the vulnerable.”

This tactfully articulated statement succinctly encapsulates both the performance and the IMF’s expectations of the social safety net program, known as Aswesuma. This program was swiftly implemented, by the Sri Lankan government in response to the economic crisis and to meet IMF expectations to release a bail-out loan.

It is now incumbent upon civil society to address this call to action and deliberate on how to enhance the social safety net, ensuring effective support for those who have borne the brunt of the economic downturn and its continuing repercussions.

Below is a condensed summary of the observations put forth by the Centre for Poverty Analysis (CEPA) during their meeting with the IMF review team on September 21, 2023. This meeting was hosted by CEPA and aimed at providing civil society organizations a platform to voice their perspectives. This summary is intended to spark a broad civil society discourse on strengthening the social safety net program, drawing from the experiences gained through the implementation of Aswesuma.  The observations on the Aswesuma program were presented in the following key areas: Intentions, Conceptualization, Design, and Implementation of the program.

Intentions of the Aswesuma program: It is acknowledged that the economically vulnerable, particularly the impoverished, bear the brunt of the ongoing economic crisis and concurrent institutional reforms, including cost-based pricing of essential services. The IMF’s proactive stance, emphasizing the imperative need for an effective safety net to shield the poor, was commendable and considered a crucial precondition for approving the IMF economic ‘bail-out’ package.

The rationale behind the Aswesuma program, which sought to rectify shortcomings of the Samurdhi program, was deemed somewhat lacking. While it’s true that the Samurdhi program had inclusion errors by providing cash transfers to affluent households and excluding deserving poor ones. Inclusion errors were likely a result of political favoritism rather than a fundamental problem with poverty assessment. These discrepancies could have been rectified through an auditing process. Additionally, the exclusion errors in Samurdhi may have been driven by budgetary constraints. Consequently, the intent to replace the Samurdhi poverty alleviation program, which has been a comprehensive and robust rural institution for three decades, was not favorably accepted, if it had been an intention. Aswesuma’s role as a short-term cash transfer program to alleviate poverty during economic crises was acknowledged, but the importance of continuing a comprehensive poverty alleviation program like Samurdhi, beyond the cash transfer safety net, was underscored.

Conceptualization and design of the Aswesuma program: Aswesuma was conceived to address the unique challenges of poverty during an economic crisis, aiming to alleviate the suffering of the poor while catalyzing grassroots-level economic growth. This necessitated the distinction between the general poor and the particularly vulnerable poor, each requiring tailored intervention strategies. While this recognition seems implicit, it warrants more explicit attention.

A pivotal change introduced by the Aswesuma program was the adoption of a new Multi-dimensional Poverty Indicator (MPI) to categorize poor households into four groups: severely poor, poor, vulnerable, and transitional (see Gazette number 2302/23 dated October 20, 2023). For an in-depth analysis and critique of this altered poverty measurement methodology, refer to CEPA blog posts (https://www.cepa.lk/blog/). It’s worth noting that the MPI used by Aswesuma primarily gauges the long-term repercussions of poverty on households, rather than its immediate impact, which is a limitation. Furthermore, it remains unclear how the MPI effectively differentiates between these identified groups of poor. The MPI demonstrated weaknesses, particularly in identifying severely poor and poor households, evidenced by the high number of grievances received post-selection for Aswesuma cash transfers.

Potential technical deficiencies in the MPI include considerations about the suitability of chosen poverty indicators, the high number of indicators, and potential correlations among them. The abundance of poverty indicators might contribute to data collection errors. Comparing different indicators between recipients and non-recipients of Aswesuma has led to social frustrations.

It appears that adequate stakeholder consultation, technical analysis, and pilot testing were not sufficiently conducted to validate the selection of poverty indicators. While the methodology for poverty measurement has been publicized through gazettes, the methodology for determining poverty thresholds for the four types of poverty remains ambiguous and mysterious. Reevaluating how to measure poverty and identify those in need is imperative to bolster the social safety net program. Consideration could be given to measuring poverty through household income as the primary metric, with a poverty line based on fulfilling basic needs (complemented by other indicators). Distinguishing between poverty and poverty vulnerability, or the risk of falling into poverty due to external shocks like those brought about by economic crises, necessitates a robust intellectual, research-driven, and stakeholder-consultation-based process.

The increase in cash disbursements per household under the Aswesuma program compared to the Samurdhi program was acknowledged. However, concerns arise regarding the actual value of these increased cash transfers, given the exceptionally high inflation rates experienced during the peak of the economic crisis, as well as the persistently high and sticky prices of essential goods and energy. This is an empirical issue that warrants thorough examination.

Implementation failures of the Aswesuma program: Implementation failures of the Aswesuma program were evident in the widespread public protests that erupted following the initial announcement of Aswesuma cash recipients. Officially, there were 982,770 appeals and 62,368 objections raised regarding the selection process. The data collection encountered a setback due to a legal issue raised by Samurdhi officers, who were tasked with gathering data. Instead of promptly resolving this, data collection was delegated to untrained and inexperienced enumerators. Many have alleged subpar data collection practices from households, resulting in the inadequate identification of impoverished households. The well-established system of cash transfers through Samurdhi banks to needy households was replaced with commercial banks, which were ill-prepared for the transition. This led to confusion and long queues around banks, causing discomfort for the public. The full implications of this change on the functioning of both the Samurdhi banks and the Samurdhi program as a whole remain to be seen.

While the MPI methodology was gazetted and the public was informed, the implementation lacked transparency. The criteria for the four different poverty measures and the weights applied were not disclosed to the public. Transparency in sharing this information would have facilitated a clearer understanding of the rationale behind these choices. In this context, the purpose of gazetting the methodology appears to have been rendered ineffective. The process of determining who is considered poor and eligible for cash transfers has become centralized, lacking transparency, and shrouded in mystery, giving rise to concerns of authoritarian decision-making. It has been proposed that poverty alleviation programs should not be centralized, but rather administered at the provincial level.

The adoption of the new MPI poverty measurement method, along with the centralization of the decision-making process for identifying beneficiaries of cash transfers, was justified on the premise of reducing political influence on this selection process. However, the political process opted to temporarily include nearly 400,000 households to continue receiving Samurdhi benefits until the complaints are addressed. This unexpected political intervention in the Aswesuma program has been likened to introducing an unwanted political element into an otherwise functional system.

The IMF anticipates that government budgetary allocation for the social safety net program would amount to 0.6-0.7% of the GDP annually. Ensuring the feasibility of this allocation, raises concerns, particularly in light of the current sluggish economic growth rate and the absence of a publicly shared program to enhance GDP and government revenue, which falls below IMF expectations at present.