20 May, 2022

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IMF Facility? Is It Sufficient To Deliver Prosperity To Sri Lankans?

By W A Wijewardena –

Dr. W.A Wijewardena

At last, IMF is viewed as the saviour

The Sri Lankan team headed by Finance Minister Ali Sabry has been in negotiation with the officials of the International Monetary Fund, popularly known as IMF, for a credit facility to overcome Sri Lanka’s acute Balance of Payments or BOP problem. The team had been jubilant over its success as revealed by a media statement issued by the Ministry of Finance. However, IMF’s Sri Lanka mission chief Masahiro Nozaki has told Reuters by email that discussions are still at an early stage and a pre-condition for a Fund facility has been having a debt sustainability scheme in place.

What this means is that it is a tough negotiation for the Sri Lanka team. Obviously, it should be the case because Sri Lanka had allowed the economy to be paralysed by refusing to go to IMF despite the mounting pressure for same for more than 15 months. The decision to avoid IMF had been made by the chief policymakers of the Government made up of President’s Secretary Dr. P.B. Jayasundera, Central Bank Chiefs W.D. Lakshman and later Ajith Nivard Cabraal, and the Treasury Secretary S.R. Attygalle. They had convinced the President Gotabaya Rajapaksa who is a green horn in economic matters that they had an effective homegrown policy that obviates the need for seeking IMF’s intervention.

In fact, Governor Cabraal had presented this homegrown policy in a six-month road map revealed on 1 October 2021. It had overestimated the inflows of foreign exchange to the country, and as a result, the forex situation deteriorated by the day. The drying up of the foreign exchange in the formal banking systems and the depletion of the Central Bank’s foreign reserves to near zero level caused an acute shortage of raw materials for industries and essential goods for consumers causing long queues to appear on one side and thriving of a black market for dollars on the other. Finally, the rupee was floated without adequate preparation driving it to wild fluctuations in the market. By this time, all the four policy leaders have lost their jobs.

Gotabaya admits his policy follies

Earlier President Gotabaya Rajapaksa addressing new ministers admitted that Sri Lanka would have gone to IMF earlier and denying chemical fertilisers and pesticides to farmers was a mistake. This shows the President’s naivety in these matters. When President J.R. Jayewardene had been told by everyone that Sri Lanka should seek assistance from IMF and the World Bank in late 1970s, the doubtful JRJ had sought expert opinion on the matter. He had invited Singapore’s first finance minister and then its deputy prime minister Dr. Goh Keng Swee to advise him on the matter. Goh had presented a 27-page report to JRJ recommending that Sri Lanka should obtain both IMF and World Bank support for its chronic economic problems. Had Gota also sought expert views on the subject instead of relying on the 4-gang policy advisors, he could have avoided the present economic catastrophe which is now threatening the continuation of his administration.

A tough negotiation for the Sri Lanka team

Gota has said that both errors have now been corrected. However, he had admitted only two of the many policy errors his administration had made since assuming presidency in November 2019. They still need be corrected and it is because of this lapse that the negotiation with IMF has become a tough affair for the Sri Lankan team. Echoing this policy correction requirement, IMF’s Managing Director Kristalina Georgieva had put a message on her Twitter account that Sri Lanka and IMF had discussed the policy actions to address economic challenges and undertook to work together to map a pathway for the country’s economic recovery. Though these policy actions had not been spelt out by Kristalina, a feel of them could be got by referring to the latest IMF staff report on Sri Lanka under its Article IV Consultations.

IMF: Increase Government revenue

The first policy action it had recommended was that Sri Lanka should increase its Government revenue by increasing income taxes and value added taxes through quality revenue measures. This effectively requires the Government to go back to the tax system that had prevailed prior to 2019 and not to use such arbitrary taxes like the surcharge tax on past profits of high profit makers and increase in VAT on financial services. The tax system was corrupted by the Gotabaya administration in December 2019 by committing a serious economic folly by offering an unsolicited highly attractive tax concession to both income tax VAT payers.

This created a huge dent in revenue amounting to about 4% of GDP and the Government is still suffering from this dent. When this was announced in the election manifesto, I warned him against the implementation of this disastrous measure in December 2019 in an article in this series.

Subsequently, on two occasions the Government was requested by me not to implement that tax package. This loud voice was not heard by the administration because its top policy leaders had been imbibed by their own heavy intoxication of non-working homegrown policies. Now, IMF has warned Ali Sabry that the Government should take measures to fill the coffers that have been empty.

IMF: Free the exchange rate

The second policy prescription was the freeing of Sri Lanka’s exchange rate from the strict control of the Central Bank. What IMF has suggested was not the wild floating that is happening now but a planned floating as Sri Lanka had done in January 2001 with support from the Fund. Despite the mounting pressure for the rupee to depreciate in the market, the Central Bank under both W.D. Lakshman and Ajith Nivard Cabraal had kept it at Rs. 200 per dollar by wasting the country’s foreign reserves.

Consequently, the foreign reserves fell from $ 7.6 billion in December 2019 to $ 1.9 billion at end-March 2022 by $ 5.7 billion. This loss would have been avoided had the Central Bank allowed a gradual floating from early 2020. When the usable reserves were near zero, the Bank had to give up its elusive goal of holding onto Rs. 200 per dollar in late March. Thus, the floating was done not by choice but by circumstances.

IMF: Ensure debt sustainability

The third policy prescription relates to IMF’s observation that Sri Lanka’s debt sustainability is weak, and the country should start a program on debt restructuring. Sri Lanka’s foreign debt has been a critical issue because the Government led by the present Prime Minister Mahinda Rajapaksa had borrowed from commercial and bilateral sources and invested in projects which were not paying back even in Sri Lanka rupees. The Lotus Tower rising to the sky in the city of Colombo is a case in point. As a result, much needed foreign exchange to service these loans was not earned by Sri Lanka as indicated by the falling ratio of exports to GDP from high 26% in 2005 to 12% today. Naturally, foreign debt is unsustainable and cannot be serviced.

It is in this background that the Ministry of Finance announced that Sri Lanka will not service its debt falling due from 5 p.m. on 12 April 2022 with the objective of restructuring the same. Toward this end, requests for proposals were called for appointment of legal and financial advisors but they are yet to be appointed. Hence, it might take another 3-4 months for Sri Lanka to formally restructure its debt. In the meantime, the country’s credit rating has been cut to the lowest level possible at C or Ca or CC by all the three rating agencies. This is imminent default rating and as a result, when the sovereign gets that rating, all the entities within the State including commercial banks will also get the same rating. The Gotabaya Rajapaksa administration should appreciate this catastrophic situation it is in.

IMF: Tighten monetary policy to curtail inflation

The fourth policy prescription says that Sri Lanka should tighten monetary policy amidst rising inflation. Official rates show that it is at 22% but the global inflation tracker, Steve Hanke of the Johns Hopkins University, by using the purchasing power parity theory has put it at 120%. Along with this, the Central Bank has been advised by IMF that it should not accommodate the funding requirement of the government which has already increased by Rs 3.2 trillion or 118% during the 26-month period since December 2019.

Consequently, the money stock has increased by Rs. 3.1 trillion or 41%. When the real economic growth during this period has been just 1%, this is recipe for uncontrollable inflation to hit the country in the period ahead. So, interest rates are bound to double or treble in the coming months derailing quick economic recovery prospects. At the present state, inflation has been reckoned as the public enemy number one. The Central Bank will look at growth matters only after this enemy has successfully been defeated.

IMF: Make Central Bank independent

The last prescription has been that the Central Bank should be made independent from political interferences. I have analysed this issue and demanded for Bank’s independence from the undue interference from the Ministry of Finance when I delivered the 68th Anniversary Oration of the Central Bank in 2018. There had been a new central banking law drafted by a committee under the chairmanship of the present Governor Nandalal Weerasinghe when he was the Senior Deputy Governor of the Bank. This bill had been accepted by the then Good Governance government and was about to be tabled in Parliament when Gotabaya Rajapaksa was elected President in November 2019. He shelved this for reasons known only to himself and his chief policy advisors. Had he not done it at that time, IMF would not have made this demand today. Therefore, it is a matter for the current Parliament to retrieve it from its archives and enact it as a matter of priority.

Sri Lanka would have sought IMF support much earlier

Thus, getting a credit line from IMF is not a cakewalk but a battle saddled with a tough negotiation. Sri Lanka’s bargaining position is weak because all its macroeconomic indicators depict ailments beyond recovery even under the care of medical experts. Had Sri Lanka gone to IMF when we asked the administration to do so in the middle of last year, much of the things which the country has lost now could have been saved and the negotiators could have presented themselves before the IMF team with confidence. It seems now a losing battle, but it is still worth trying out for a breakthrough in securing a funding line from IMF.

IMF funding is necessary but not sufficient

Many seem to be harbouring the belief that if Sri Lanka gets a bailout from IMF now all its economic woes are settled. That is not the case because IMF will help Sri Lanka to resolve its financial sector issues and that resolution is necessary but not sufficient for the country to get back to a high growth path. That part should be settled through the establishment of conditions conducive for growth to take place on one side and the introduction of a proper real sector plan, on the other. It is the responsibility of the Government and not of the Central Bank or IMF to establish these conditions and introduce such a plan.

Bring back 19th Amendment plus

The conditions that are conducive for long-term economic growth are the establishment of a good governance regime, observance of the rule of law, maintenance of law and order, and promotion of a healthy institutional setup in Sri Lanka. Sri Lanka has attempted to reach this goal by introducing the 19th Amendment to the Constitution in 2015. That was the beginning of a process that would have taken a long time to accomplish. However, it was reversed in 2019 by introducing the 20th Amendment to the Constitution.

When this was debated in Parliament, I tried to put sense to the legislators who were planning to vote for the amendment by highlighting the virtues of the 19th Amendment and what they would lose as a result of enacting the 20th Amendment. Now it is revealed that those who had voted for it are regretting the choice they had made in 2019. Hence, as a matter of priority, the 20th Amendment should be annulled, and a stronger 19th Amendment should be enacted.

Have a long-term development plan

Simultaneously with an IMF-led bailout supported by a proper legislative reform, the Government should come up with a medium to long-term growth plan to push the country’s growth up and bring prosperity to its people. This requires Sri Lanka to move away from the present manufacturing pattern of producing under the conditions of the Second Industrial Revolution and seamlessly integrate with the Fourth Industrial Revolution that is in vogue today. For this, Sri Lanka has to bypass the Third Industrial Revolution and it is not an impossibility for the country provided it adopts a suitable strategy and continue with that strategy over years.

In this connection, Sri Lanka can learn a valuable lesson from Vietnam which introduced a 10-year road map in 2020 to convert its economy to a high-tech manufacturing country by 2030. Vietnam has followed in this connection the example set by Thailand, Indonesia (visit:, and Malaysia. Sri Lanka is a laggard in this connection, and it should reframe its policy strategies to attain this goal over the next decade or so.

Thus, IMF will help Sri Lanka to survive through the current financial sector crisis. It is only a half of the battle which it must win. The full victory will come only when it has a proper real sector plan, supported by a conducive governance structure, to integrate the economy to the Fourth Industrial Revolution seamlessly.

*The writer, a former Deputy Governor of the Central Bank of Sri Lanka, can be reached at waw1949@gmail.com

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Latest comments

  • 4
    0

    It was proud not get any fund from IMF without doing an alternative arrangement instead they lied about the country strategy to cover up now chinses school children are collecting funds for Sri lanka,
    Intelligent without ambition is like a bird without wings. One thing can be done was not done to be self sufficient in agriculture. live where they work and to work where the live

  • 7
    2

    It is a privilege to to read such articles, written in simple language that any layman can understand. Thumbs up to the author for taking the time to educate us. Finance is never an easy subject for the uninitiated. Thank you Dr. W.A Wijewardena.

    • 9
      1

      As a nation, we are very good at spending money before we earn it, whether it is the latest gadgets, fancy cars, expressways, empty airports or harbours, etc. The alleged economic planners are even more clueless, like the ones who wanted 70% renewable energy in 10 years, or the ones who wanted a totally electric vehicle fleet by 2040. Are these people for real?
      It will take a longtime to get back to anything like normalcy. In the meantime, any solution should include banning of hire purchase and restrictions on credit cards. Let people learn to live within their means.

      • 5
        0

        How much money will IMF loan for the bail out. Compare this with Pakistan, which has a higher GDP than Srilanka, which is still solvent though on the brink, which is also negotiating with IMF for a bail out. There is news that initially IMF agreed to loan 6 billion USD, but now on appeal, have raised it to 8 billion USD to them Srilanka has declared bankruptcy, and IMF will be giving whatever loan, very well knowing that they will not get their money back at least within 10 years. With stringent conditions attached, there is every chance that Srilanka will default, whatever party comes to power. Will Sinhalese who have inflated ego, megalomaniac ideas and extravagant life style, abandon them and rise to the occasion.

      • 5
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        old codger,
        Living within ones means is never learnt; It is in you, or not.
        Credit Cards were introduced by banks in consultation with behavioral scientists.
        .
        In Sri Lanka the Rajapaksas took it to a different level, to profit from the commissions and kickbacks.
        .
        I’ll illustrate.
        .
        My bank called me, one day.
        This is how the conversation went.
        “Nathan, Are you in possession of your credit card?!”
        “Why do you ask?”
        “We believe that you have lost it!”
        .
        On checking I found out that my bank was correct.
        .
        They suspected that, because a purchase was NOT in accordance with my spending pattern.
        .

        • 4
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          Nathan,
          Are you sure you didn’t give it to your wife?

          • 0
            0

            Are you trying to breakup marriages?

            Ramona has Amex Gold ……. buys nothing but Crypto!

      • 0
        0

        Dear oc,
        .
        This is an excellent account of what Lanka seems like to an outsider:
        .
        https://www.bloomberg.com/news/features/2022-04-27/how-paris-is-waging-a-war-on-noise-pollution
        .
        But, beware, I think that you can open this only once, after that they try to sell you whatever else they produce.
        .
        And here’s Sharma Gupta warning us that energy prices are rising world-wide:
        .
        https://www.youtube.com/watch?v=0H68w6Fjcuo
        .
        A warning on the same lines. A grim future indeed for us who have had some of the least intelligent humans leading us for two years.
        .
        Panini Edirisinhe

        • 0
          0

          Oh, dear, ti was the article above that, but see if they both open for you.

    • 3
      0

      Finance is never an easy subject for the uninitiated.
      .
      Those who lend should set rigorous guidelines.
      .
      Those who borrow should comply with the them to a manner transparency and accountability are guaranteed.
      .
      Without that not single a cent should be given to any countries/ that way funding bodies can help improving the world standards in far corrupted developing nations .
      .
      Human beings can only be controlled by enforcement of rigorous laws.
      .
      😶✌🤔🐕🐃😎🤔🤔🤔

  • 5
    0

    While commending the writer at his frank revelations (despite the “I told you so” syndrome) there needs to be a clean sweep of the political culture that has brought Sri Lanka to this utter mess. It is not just the finance ministry under a kaputa or the Mr Bean like kabba that made matters bad, but the whole culture of entitlement that the ruling family had foisted on not just economic policy or finance administration but the country in total. The first priority that legitimate lenders must insist on is the exit of the parasitic ruling class. No unconditional “friendly deals” are necessary as future generations will have to repay for the follies of the rascals that obtain such loans.

  • 2
    0

    Them sinhalas will never ever reach any prosperity until they start treating ceylon tamils and other minorities as equals and not as tragets for rapes murders lootings and arsons since has been periodically since independence. It is STRANGE that these same sinhala beggars when the go overseas to ther countries expect and want to be treated as equals of the other citizens of these other countries. Me for one have only contempt for these sinhala beggars

  • 2
    1

    People like EE who constantly make comments like go back to Hindustan (while proffering the begging bowl to Hindustan) re ceylon tamils.

    This CANARD that the beggar sinhalas were the original inhabitants of sinhala land has to STOP!

    I recollect reading a news item by a ‘learned sinhala” i believe sometime in 1970s that the Australian aboriginals were really sinhalese origin because they had places name like Alyangula (Ali elephant) etc and the Australian embassy responded that this claim is crap and saying that there is a New Zealander named Dame Kiri Kiri and that this not mean that she is of sinhala origin (she probably she will be mortified of any sinhala heritage).

    The Dravidians were the original inhabitants of india and sinhala land and EELAM and despite any attempts to rewrite history by the descendants of the Vijaya thugs including by the mythology mahavamsa , AND the burning of the Jaffna Library with its ancient manuscripts by the barbaric sinhalas (to eradicate the original and true history that the tamils were the original inhabitants and the Thugs Vijaya and his descendants are interlopers) this rewriting of history is not going to happen.!!

  • 0
    0

    “This requires Sri Lanka to move away from the present manufacturing pattern of producing under the conditions of the Second Industrial Revolution and seamlessly integrate with the Fourth Industrial Revolution that is in vogue today. For this, Sri Lanka has to bypass the Third Industrial Revolution and it is not an impossibility for the country provided it adopts a suitable strategy and continue with that strategy over years.”
    The author is confused. Sounds like he has fallen from Moons, suddenly, but while not mentioning a word on the protestors, who want the whole gang of Royals to get out, which is a contemporary issue and solution for the country’s bankruptcy, but he is trying to sell his pompous ideas of third, fourth & fifth industrial revolution of productivity. Sad to see this lonely guy building his own Wonder Castle of Asia in his backyard, to save the Royals from protestors. I want to know how many of the readers honestly believe the ideas here can be implemented by Royals so they can continue in power, dodging the protestors? If the protestors will not buy these, what is the great idea behind bringing this advice here at this time?

  • 0
    0

    How many of you honestly think that these ideas can satisfy the Royals, while preserving and protecting their investments in the government, and it can keep Modaya to feel happy who wanted to install a Hitler to save the country by starving the Tamils and other minorities. Have you seen a mother firing crackers and celebrating Diwali while her child is hungry for days because of the poverty of the family? That mother is this author who is unconnected from the circumstances and is not able to advise the ways for Royals how to get out from there safely so the country won’t meet more deaths. I want the readers to put a practical value and a monetary value to this lengthy, outdated consultation. This what one call as “conducting prayer to sun after becoming blind”

    This author never condemned the war but advocated it as an essential activity to salve Tamils and keep them under the Sinhalese feet. It is not that Nivard Cabal killed the country, but as per Author, he was a smart finance manager, who financed the $400B war with 3 months LC credits. The author wrongly thinks taxing people brings income to the government.

  • 0
    0

    If the people had demanded the government to let the National AirLine with Peter Hall, now the country would be earning a lot of revenue, while most of it would be in forex. Can the author describe one government who was successful in bringing FDI like Bangladesh or Thailand and improving the internal production thus creating Income and forex? It was the Mangala’s (Yahapalanaya) (to help Royals to make black to white their $18) Foreign Exchange Fraud Amnesty Bill (2017) branded Langkang as safe haven of Money Launderers and started to strain the exchange rate from 2017. It was not the author, but we predicted that the rupee was going to fall in one year to $1=300 Rs. But some other CB Cabals played Jilmats and delayed it. Now the Rupee is going to reach its true value, probably more than 500 for a dollar.

  • 0
    0

    During Yahapalanaya’s 19A , which was drafted to make a hero out of Ranil, who was the main man selling assets to China while blocking the Western FDI coming to the country, labeling it neo-colonialism spreading its wings. Now China itself accepts that it was the one blocking the country from reaching the IMF, because the IMF would prescribe the excessive borrowing to be restructured. The only solution to Lankawe is not Sinhala Intellectual diverting the protestors attention and save Royals but forcing them with proper advice to dislodge from the government. Come on guys, Please don’t become Ranil’ s acolytes in saving the Royals. to sell your fame, Don’t cheat the people again and again with this kind of advice to Royals. Find ways to kick these bastards out. “Pitchai Veandam Naiyai Pidi.” Get the hell out of here, the Royals, first. Then come with you Fifth Generation, sixth Generation pompous talks of Asia Wonder.

  • 2
    0

    I knew the IMF will not under any circumstances lend money to a cabal of crooks and murders no matter what the racist Indian government asked of them to do. Unfortunately the writer of this article in typical thoththbaba style wrote another ridiculous article about an IMF bailout. Now we know the result. No bailout. No money. Go back to the Chinese grovelling and agreeing to Chi Lanka or witness the slow disintegration of a nation once know as a jewel in the crown. The prosperous colony of Ceylon who had the best chance of becoming a first world economy. What a sorrowfull story.

  • 2
    0

    The International Monetary Fund (IMF), when it hands out loans, requires economic restructuring that opens a nations’ economies to Western exploitation and subsequently domination. No country gives you anything for free. There must always be payback. Finding out what is the easiest, cheapest, is the task.

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