My last article (https://www.ft.lk/columns/Welcome-2022-Lessons-learnt-and-future-manoeuvres/4-728606) was to be continued covering the Economic Recovery program. Today this has become a hot topic discussed by many. Before we address the subject, it would be prudent to take a look at the reference made by the World Bank Overview update of 7 October 2021 about Sri Lanka, quoted below.
“Growth is expected to recover to 3.3% in 2021, but the medium outlook is clouded by pre-existing macro-economic weaknesses and the economic scarring from the COVID-19 pandemic. Official reserves remain low relative to short-term liabilities amid constrained market access. A severe foreign exchange shortage is exerting pressure on the exchange rate. Urgent policy measures are needed to address risks to debt sustainability and external stability.”
More recent developments point towards a worse gloomy situation. The CCPI (Colombo Consumer Price Index) rose beyond 9.0% in Nov/Dec with the inflation surrounding food items reaching 17.5%. There is a strong uncertainty about food security and households are concerned about running out of food. The increase in food prices and shortages of many essentials are adding to the rising inflation. The fuel increase after a long period of nearly two years has aggravated the living conditions as well as the general hardships in day-to-day life. The Central Bank increased the policy rates consequently raising both Standing Deposit Facility and Standing Lending Facility to 5.0% and 6.0% respectively in order to curb the inflationary pressure.
Foreign reserves are used mainly to service the debt within the available limits and the reserve position is becoming highly volatile with slowing down of remittances from overseas employed and reduced income from other sources such as the tourism sector. The depleting foreign reserves are causing further vulnerabilities making it imperative to resort to stringent Import restrictions.
It is in this context urgent policy measures are needed and takes the priority in addressing the growing uncertainties. Among the various proposals and suggestions made seeking assistance of international agencies is considered as a basic necessity and as the bottom line of the solution.
Is the IMF a ‘Crown of Thorns’?
The ongoing debate is centred mainly on two aspects. There is one school of thought that the IMF will grant assistance only on conditionalities that will be imposed on the borrowing country. Such conditions according to the understanding of some have been and could be harmful and cause hardships to the people. The other view is, there is no need for us to subject ourselves to external conditions when we can resort to other methods of alleviating our difficulties without burdening the people. We are compelled to look at the pros and cons of both viewpoints in a balanced way.
The current scenario
Dilemma about seeking IMF assistance seems to be the centre of focus. Even in this highly decisive moment the decision makers appear to be vacillating between hope and fear in their choice of words as well as the conclusiveness of the matter when it comes to getting assistance from the IMF. The last public statement we heard coming from the Finance Minister was something that sounded like the proverbial “difficult to drink because it is hot but cannot throw away because it is milk”. His extremely fragile reference in response to a question from the media personnel when asked about the decision to go to IMF sounded evasive. He replied saying, “No, we haven’t decided to go to the IMF, but we will start discussions with them,” indicating that we are now in the process of considering whether to go or not.
Be that as it may, this shows either the decision makers are dilly-dallying or are trying to administer it in small, slow doses due to the prevailing highly canvassed antipathy against possible damaging effect it will have on the social welfare measures now implemented by the country. However, People appreciate firm decision making rather than wasting time, hesitating.
Sri Lanka’s relationship with the IMF is nothing new. Since joining the IMF as a member country in August 1950, we have received 16 facilitations and the last standard loan we got from IMF was in June 2016. The IMF approved a loan to the value of SDR 1.1 billion which was equal to $ 1.5 billion under the Extended Fund Facility with a repayment plan to be completed by 2028 beginning 2020. The lending arrangement was spread over a period of 36 months with the disbursement of the loan in six instalments. In 2009 Sri Lanka obtained the highest amount as a loan from the IMF which was more than $ 2.5 billion as a stand-by arrangement.
Our record with the IMF is very clear and we have never defaulted or failed to repay our obligations to the IMF. We have a member quota of 80 million SDR (equal to $ 800 million) in the IMF as a member country which provides us a voting right of 0.14 on the IMF board of Governors. We have experienced difficulties with the compliance conditions on a few occasions such as the Compliance with the EFF facility of April 2003, which was due to the tsunami situation.
The most contentious issue about going to the IMF is the conditionality of lending. There is also a fear that the developed countries which have the final say in the fund as its influential members, act discriminately when it comes to granting assistance and are less mindful about the basic welfare nature of our democratic system of government. Therefore, the conditions imposed at their initiative can be tyrannical to our governance structure. While we do not totally reject these views, we have to weigh the pros and cons in the context of the global economic trends and adjust ourselves to the mutual satisfaction of all parties. In a modern world with rapidly changing scenarios and emerging economic issues there will be sufficient space for reaching negotiated understandings among the stakeholders more freely.
Let us now take a look at these so-called draconian conditions imputed by many objecting to the IMF option. Generally, these conditions vary with each borrowing country depending on their individual status. But if we look at the conditions the IMF imposed on us in our last borrowing program, we can have a clear picture about the nature of those and whose interest they are trying to safeguard.
1. Lower budget deficits
2. Monetary policy reform
3. Higher government revenues
4. State enterprise reform
5. Stronger public financial management
6. Supporting higher trade and investment
Now these were the conditions imposed on us when the IMF approved the 2016 June Extended Funds Facility. It is interesting to note the circumstances under which this facility was requested by the Sri Lanka Government. Three main reasons were given;
- To deal with the immediate balance of payment pressures
There was an unsustainable situation that arose due to weaker FDI inflows and capital outflow from the Govt. Bond market caused a severe fall in the foreign exchange reserves.
- To unlock and facilitate other financing arrangements
The assistance coming from the IMF was believed to strengthen the credibility of the govt. in the finalisation of pending multilateral and bilateral loans to supplement the reserves.
- To reassure private investors.
The stepping in of the IMF at that moment would contribute towards the elimination of doubts about the probability of a default of the existing private sector debts.
This situation existing then is not much different to what we are seeing today. In fact, we see them in a much more serious form now. But there was no pandemic then. The only issue was that the Government wanted to resort to politically favourable changes to consolidate their political stability. They went on granting tax holidays, salary increases, and liberalising the welfare measures to achieve this. If the IMF was ready to accommodate a request, then, under such a scenario, there should not be any apprehension about approving a facility now to overcome the present-day crisis. Particularly when it is not a problem confined to us only, but a global phenomenon due to reasons well beyond one’s control and circumstances unforeseen.
Another advantage in associating ourselves with the IMF in an economic recovery program is the benefit accruing to us through their monitoring function which involves surveillance and capacity building in addition to their lending function. We have to remember that a member country of the IMF is entitled to request and obtain financial assistance in a situation of a lack of sufficient foreign financing and reserves to meet its international payments. In our case the factors that have gone to trigger the current economic impasse will be accepted as due to circumstances beyond our control.
Under these circumstances an effective economic revival program could only be successful with external support which in addition to the financial strengthening contributes to the confidence building and the catalysing effects it could generate associated with the financing program. A loan or a currency SWAP obtained under a bilateral agreement will not deliver this benefit. These will be effectively addressed best by an international organisation such as the IMF.
It is no secret that we have already imposed many conditions by ourselves to put the house in order despite the fact that they are causing hardships. It is highly unlikely that the IMF will impose any hardships beyond the vital corrective steps necessary as essential adjustments to correct the system.
Their assistance could be solicited in a number of ways including policy planning as well as corrective assistance. We have no doubt there will be alarming revelations if the IMF surveillance role is effectively implemented to identify the risks, malfunctions and to recommend appropriate corrective measures. Frauds, corruption and wastage are rampant in the SOE sector which is just allowed to continue unchallenged.
The only growth that will be shown by the few white elephant turned SOEs is in their indebtedness. Their operations only contribute to increasing our cost of living due to the necessity to finance them with Public Funds for their survival and maintenance. If our governments cannot effectively introduce corrective measures the only other option is to subject ourselves to stringent controls imposed on us by way of conditions by a lending agency duly monitored under a program of surveillance and capacity building.
We still remember how the two State Banks became insolvent overnight following an International Audit initiated under a World Bank program in the 1990s. The two banks were showing profits and paying taxes to the government based on their operations well shielded under the unethical accounting systems they were following then. The Treasury was blind to what was happening and the local audits never divulged any operational or accounting malpractice. Thanks to Arthur de Little and Booze-Allen Hamilton, all their statistical juggleries were exposed and the Treasury and the Central Bank, which continued oblivious to the situation about their doomed progress, were forced to open their eyes.
The shortcomings and the malicious operations highlighted were summarised under a few headings such as,
- Capital inadequacy to meet the Basle Standards
- Inadequate loan loss provisions (non-performing loans)
- Continuation of bad loans of State organisations
- Insufficient provisioning to the employee pension funds
- Non transparency of their operational systems
This course correction concluded with the provision of Government Bonds to the value of Rs. 24 billion to both banks preventing their insolvency and saving them to continue as State-owned enterprises instead of a privatisation. Unfortunately, the corrective steps recommended did not bring about any positive changes as anticipated due to the lack of a proper monitoring system. There will be no economic recovery without addressing these.
We are sitting on a volcano. How soon and at what moment the eruption will take place is something we are yet to witness. All regimes under whom we were governed allowed this state of affairs to continue. The caravan moves on. Dogs bark. We are dancing on the edge of the abyss.