IMF loan: Out of the trap or into the fire?

Finance Minister Ravi Karunanayake with the visiting delegation of IMF officials in February 2016 - File photo

By Alliance for 

Economic Democracy

The Government of Sri Lanka entered into an agreement to obtain a loan of $ 1.5 billion with the International Monetary Fund (IMF) in June 2016. In addition, loans worth $ 650 million were raised via bi-lateral and multi-lateral donors including the World Bank (WB) and Asian Development Bank (ADB). 

Under this Extended Fund Facility agreement, the IMF is prescribing medium-term structural reform policies for Sri Lanka. While the conditions proposed by the IMF will have far reaching impact on the Sri Lankan economy, there has been very little public discussion about it. It is very important, therefore, that the people become aware of the policy measures and economic changes that are going to impact their lives.

Why did the Government obtain the IMF loan?

In the first quarter of this year, the Government faced a serious crisis due to the mounting foreign debt and balance of payment problems. The crisis was caused by rising imports, including of luxury vehicles, which were permitted in the Government’s irrational 2016 Budget announced late last year. Furthermore, Sri Lanka’s foreign currency reserves had fallen to very low levels due to the flight of global finance capital with the downturn and increasing instability in the global economy. 

Such global capital had entered the country over the last many years as part of massive foreign loans taken for large infrastructure projects. The IMF loan was obtained to increase the foreign currency reserves, to facilitate new foreign loans and to restore normalcy to the country’s external accounts.

The Government now claims that the economic crisis has been overcome. However, the loan facility is subject to fulfilling the conditions laid out by the IMF, including structural reform policies to be implemented with strict targets. Is the IMF helping us to come out of the trap of economic crisis or pushing us into the fire of greater dispossession? 

Historically, IMF-WB interventions have shaped Sri Lanka since the first WB mission in 1951. However, it is the IMF’s structural adjustment package after 1977thatresulted in the shift to an “open economy.” More recently, the Rajapaksa regime took a US$ 2.6 billion IMF Standby Arrangement Facility in 2009, along with promises of economic development. Instead of the promised stability and development, such IMF loans and related policies have steadily pushed the country into repeated and deeper crises.

What are the conditions in the IMF Agreement?

The IMF is insisting on several structural changes in the years ahead including the consolidation of the fiscal deficit to 3.5 percent of GDP by 2020, increasing taxes, restricting public expenditure, reforming state-owned enterprises, liberalising trade and deepening financialisation. At the outset, these recommendations may seem necessary and even beneficial to the country. However, these solutions result in the increasing economic burden on the people. 

For example, instead of increasing direct taxes (i.e. income taxes, corporate taxes and capital gains tax) which target the rich, taxes affecting ordinary people, like the recent VAT increases, are imposed. Similarly, while reforming loss making state owned enterprises may seem essential, they are transformed to work like commercially focused private companies, including allowing electricity, fuel and water to reflect market prices, disregarding how it might affect the people. Can fishermen cope with the sudden fluctuations in market prices of kerosene to run their boats? 

The IMF encourages free trade agreements and facilitation of foreign investments and loans. However, workers’ wages and labour rights are threatened by such moves. While liberalisation of capital flows and deepening of financial markets are encouraged, no consideration is paid to the cost of capital flight and financial crisis. Furthermore, the aggressive fiscal consolidation targets set by the IMF are likely to restrict the budget for 2017, with cuts to spending on essential services.

Thus, conditions imposed by the IMF are only concerned with balancing deficits and macro-level indicators, while transferring the risks and costs of bad economic policy choices onto the people.

Deeper impact of IMF interventions

The impact of the IMF agenda for the people is much deeper than the outcomes of implementing its set of conditions. In order to fully grasp the extent of the impact, we must examine the role of the IMF in economic policy making and the underpinning assumptions of IMF interventions. 

The IMF and the WB were formed soon after the end of world war in 1944, at the Bretton Woods Conference. The initial mandate of the IMF was to address short-term inconsistencies in the balance of payments and foreign exchange rates. The WB’s role was to enable reconstruction and development through long-term loans. However, with the breakdown in the Bretton Woods agreement in 1970s and abandoning of a pegged foreign exchange system and the gold standard, the IMF and the WB took on a new agenda and new roles. Together, the IMF and the WB began dictating structural economic reforms to countries.

Such IMF interventions have been based on problematic assumptions. Firstly, the inevitability of neoliberal globalisation, particularly the free flow of capital and goods along with a floating foreign currency. Therefore, the IMF sanctioned liberalisation of capital markets and trade led to increased global flows of capital and goods, with tremendous market fluctuations. 

The IMF took a hard hit after the 2008 global economic crisis, particularly when it was exposed by policy failures in Greece and Southern Europe. Although the recent IMF reports have admitted to the negative consequences of its neoliberal policy recommendations, they continue to influence its practice and advice to developing countries.

Secondly, it assumes that the global markets are stable and that economic problems are to do with the domestic management of the economy. IMF interventions, are thus directed towards measures for correcting national deficits and implementing structural reforms for the domestic economy.

In reality, however, the opposite is true – a volatile global market economy. We have seen that global markets are fragile and prone to frequent and deeper crises, particularly with neoliberal globalisation over the last few decades. Therefore, IMF policies end up transferring global market fluctuations and crises to the local economy. The costs are passed on to the people, via indirect taxes, cuts to public spending, increasing prices and restriction on the provision of essential services. While balancing the budget and external accounts to restore stability in the global economy benefitting global capital, the risks and costs are socialised to the people.

Our response

In this context, the IMF conditions have not only been unimaginative in prescribing standardised reform packages for all countries, they have been deeply damaging due to flawed assumptions. The conditions of the IMF will only delay the crisis and bring it back in a deeper and devastating form. However, the Government is keen on taking forward the IMF’s agenda. The upcoming Budget 2017 is likely to reflect such a neoliberal agenda including reforms to taxes, state services, land ownership and labour laws. 

The people must respond to the dangers inherent in the IMF agreement. Do we allow the Government to shift the burden of the crisis created by bad economic policies to the people? Or do we want greater equality by reclaiming our democratic rights to determine our economic life?

[The Alliance for Economic Democracy is a movement consisting of trade unions, student unions, progressive intellectuals, social organisations and activists who believe that the economic policies of the country should not be for the benefit of a few, but in the interest of all people. Contact us if you would like to get involved: Jananthan Thavarajah (0775882281), Indika Bandara (0717699049).]