16 January, 2022

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Foreign Reserves- Ranil’s Panacea- IMF Shelter?

By Rusiripala Tennakoon –

Rusiripala Tennakoon

There is much talk going on in this country about the status of Foreign Reserves and feasible mitigation measures. The debate has become a Dick, Tom and Harry affair, with all kinds of prescriptions recommending untested inhibitors. This has a great resemblance to what we witnessed during the early period of the Covid Pandemic invasion. Many cures were announced, vouching for their acceptability. We saw Pots with chanted holy waters being thrown into the River, Incarnations of famous goddesses preparing mass scale honey like decoctions and hundreds of thousands lining up in long ques to have the blessings of a holy sip motivated by the public demonstration of faith in such by our legislators, attempts to popularize different medical systems claiming superiority over each other and in most cases ironically the promoters themselves becoming victims (in some instances fatal), in their own hypotheses. Be that as it may, the issue before us regarding a solution to the impending economic crisis is something we have to address not on the basis of such amateurish expeditions due to the innumerable impacts it can cause.

Crises can come abruptly with no prewarning and some crisis develop into a critical state gradually with adequate time for fixing the problems. The hardship we are currently facing is the result of the burden imposed on our economy due to a heavy indebtedness, aggravated by the Covid Pandemic situation that has cropped up. Many have raised the question whether we can take effective precautionary action to sustain a satisfactory debt repayment program without worsening the heavy burdensome living standards and sufferings of the people. We are being pushed to a situation to address the vulnerabilities as soon as possible due to many obvious reasons.

The Global effect of the Pandemic has already caused many incapacities including the advanced economies signaling a critical backlash that would affect the low-income countries in the worst form. The world is also caught up in a tense indecisiveness due to the uncertainty associated with the controlling of the Pandemic. The Policy makers who were first concerned only with the mechanisms for preventing a second wave of economic distress following the subsiding of the pandemic crisis are now distressed over recurring new waves of COVID-19 one after the other, completely baffled by the unpredictability of the events. So, the entire World is compelled to endorse the critical nature of the Growing situation and need to take immediate action to prevent a Global economic crisis.

Any effort on our part to deal with the current situation is closely linked to this reality. We are therefore not alone. We have to take the advantage of that situation. There are several steps taken by International Organizations in this regard. The Initiative by the G-20 countries early last year to help the poorest countries to suspend their debt repayments during 2021 has to be extended further for the next year too. This is being discussed and will afford critical relief measures to many debt-ridden countries. The IMF has already granted approximately US$ 31 Billion as emergency Finances to 76 countries, In addition to facilities granted as debt relief to the poorest countries under their Catastrophe Containment and Relief Trust. The developing countries are in need of further assistance of this nature as Low-Cost financing in addition. There is a growing demand that these facilities should be further extended.

Debt re-structuring is another area receiving the attention of International Organizations and Institutions such as IMF and the Paris Club supported by policies to monitor and direct orderly implemented debt re-structuring programs. They will need information about the amounts owed and on what terms they been borrowed, etc. It is true that the Organizations will demand full information of all outstanding debts in a transparent manner followed by limitations to be imposed for debt transparency and the debt to be collateralized in future transactions.

It is an accepted fact that Restructuring of existing debt will provide a breathing space until the affected country can overcome the difficulties encountered due to the Pandemic effect and to reduce the possibility of further catastrophe and build up safe financial systems of their own. But there is no compulsion to go to IMF if the country can manage its affairs in other ways. In a modern world with several developing economies and regional co-operation it is not impossible to devise efficient and effective solutions at the regional level.

In order to avoid any misgivings associated I wish to Quote from a few lines from a latest publication of the IMF on their lending Policy;

The IMF assists countries hit by Crises by providing them financial support to create breathing room as they implement adjustment policies to restore economic stability and growth. It also provides precautionary financing to help prevent and insure against crises.

IMF identifies the causes of crises inter-alia as follows;

It can be due to Domestic, external or both ,

Domestic Factors include inappropriate Fiscal and Monetary policies, which can lead to large economic imbalances (such as large current account and fiscal deficits and high levels of external and public debt),

An exchange rate fixed at an inappropriate level, which can erode competitiveness and lead to current account deficits and loss of official reserves;

External factors include shocks ranging from natural disasters to large swings in commodity prices.

Whether the cause is domestic or external in origin, crises can take many different forms; balance of payment problems occur when a nation is unable to pay for essential imports or service its external debt repayments;

financial crises stem from illiquid or insolvent financial institutions ;

Fiscal crises are caused by excessive fiscal deficits and debt.

IN acute crises cases, defaults or restructuring of sovereign debt may become unavoidable.

The above serves as a record of medical laboratory test results of our ailing economy. We can show it to a specialist doctor for the appropriate treatment. OR we can even refer it to some indigenous specialist. Either way if the ailing problem is addressed with a proper curing plan there is nothing for to us get alarmed about.

But we have to be careful about soothsayers, mythological figures and quacks who recommend treatments with ulterior motives. Specially we have to beware of the agents of various organizations masquerading as friends giving advise.

If we start addressing the issues like the insolvencies of the various SOEs, heir indebtedness and the false profits made by some other SOEs by continuously lending to such insolvent institutions, many malefic effects can be avoided. While it is not a bad idea to seek assistance of the IMF, it has to be accomplished without surrendering our policy to utilize our resources for the benefit of the Nation. IMF in my opinion is not averse to any negotiated plans that could be mutually agreed upon. As we have persons with long experiences dealing with the International Agencies, it will be prudent to capitalize on their expertise. It will also be a good step to free the SOEs of the debts that have been accumulating to their liabilities over a period of time and make them debt free institutions to start a new span of life and put them on trial to see whether they can carry on their functions profitably in a debt free environment. All these years the SOEs either, were maintained with treasury subsidy or care free borrowings with govt guarantees allowing the banks to make huge profits by lending to govt. organizations regardless of their primary role in the development of the economy at large.

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Latest comments

  • 7
    0

    “While it is not a bad idea to seek assistance of the IMF, it has to be accomplished without surrendering our policy to utilize our resources for the benefit of the Nation”
    What resources, really? The brainpower of 6.9 million, including the author? An antique refinery ? An electrical generation system with the highest tariff in the region? An airline which loses tens of billions annually?
    The famous Trinco fuel tanks, which we have not been able to use for 70 years, but still don’t want to sell?
    No, we have no resources. All we have are liabilities from burning the candle at both ends. I blame not only the Governments but more the people for believing that it is possible to get everything free , and not pay taxes at the same time. Our economy was running on borrowed time even before Covid. We were in a fool’s paradise flaunting our fancy cars, fancy highways and hotels, sneering at Indians for their supposed lack of toilets. But now we are reduced to subsidizing the air tickets of these very same Indians to come and spend their money here. How the mighty have fallen!

    • 2
      0

      OC, this is typical of Rusiri. The man and his writings are worth nothing. His title is Ranil’s panacea, as though real economic experts, have not suggested it before. The purpose of quoting Ranil is for anti RW people to outright reject this solution.( taken out of Rajapaksas play book ). Then he gives the impression, every Tom, Dick and Harry, including RW are giving expert opinion, without realizing it includes, self claimed experts like him too. He goes on to give his expert opinion which are already suggested time and again by every Tom, Dick and Harry. One wonders, Lanka has any options left other than IMF ??. Answer is there is really none, but Rusiri wants us to believe there are plenty. Debt restructuring ??? I guess economic expert Rusiri has no clue about the current value of Lanka’s junk bonds. Using his own words, “beware of agents/con men of Rajapaksa organization masquerading as friends giving advise”.

      • 2
        0

        I encourage Rusiri, to read recent article of Laksiri, titled “Some strengths and weakness of budget 2021”. The answer is right there at the end, for every one to see. More than anything Rusiri can learn a lesson or two about writing facts than making biased political statements. Hope Rusiri will not consider Laksiri, Amir Ali as just Tom, Dick and Harry.

  • 3
    0

    Every country has to face the reality and Sri Lanka is no exception. I am sure that the people will understand the situation if the government understands the people. First thing is to unite the people to face the challenges and politicians should sacrifice their wealth and power as examples. Can they do it?

  • 0
    0

    Ajith the politicians have no interest in uniting the people. They keep the people divided so that they can grow fat. We have not yet reached the nadir, there is more to come.

  • 1
    0

    The only worthwhile suggestion Ranil ever made was “Go to the IMF to overcome this crisis” The only reason to delay is that there may not be greedy filling of personal bank accounts like from the east.

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