16 May, 2022

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IMF Or Not IMF? Reset Economy Via Seven-Fold Policy Prescription, Says Advocata Institute

By W A Wijewardena –

Dr. W A Wijewardena

Advocata: Analysing economy while improving economics literacy

Sri Lanka’s economics think-tank, Advocata Institute, in a video clip in Sinhala has suggested a seven-fold policy prescription to reset the economy now in a perilous state on all counts if authorities want to avoid IMF and go for their much-publicised homegrown solution. The story is narrated to the viewers by the communicator par excellence, Dhananath Fernando, who is versed in both Sinhala and English equally.

Advocata Institute was built from scratch a few years back by the Sri Lanka born economist Razeen Sally to analyse economic issues, make policy suggestions, and help Sri Lankans gain economics literacy. Now it is being run by a team of reputed Sri Lankan economists.

An old wiseman’s advice to a little boy in economics

Dhananath Fernando in his usual viewer-friendly style tells the IMF story to viewers as follows:

The title of the video is very appropriate: “Son, before thinking of going to IMF, reset the economy”. It is presented in the style of the advice given by an ‘old wiseman’ to ‘economics naivetes’ in the Central Bank and the Government on what they should do. The main message is ‘Look at the final goal and go for it rather than savouring in small gains’. This is presented by Dhananath by using a very apt parable involving a pilgrimage to the Sacred Sri Pada Mountain. The objective of the pilgrimage is to worship the sacred footprint of the Buddha. But on the way, you stop and enjoy sweets and pronounce that you have done your job. This is exactly what is being done by the present policy leaders of the Government.

Basil being corrected by Nivard

Dhananath starts his story from an answer given by the Minister of Finance, Basil Rajapaksa, to a question raised by a journalist at a press conference. The journalist asks Basil whether he intends to seek assistance from IMF to resolve the present external sector crisis in Sri Lanka. Basil laughs away the question saying that it is a forbidden topic. But then, he gives an explanation about the present state of the issue. He says that though Sri Lanka has not officially asked for financial assistance, his ministry has requested in writing for technical support from the Fund. That is because the Fund is the best adviser on these matters.

The project involved in the technical advice is being funded by the Japanese government. Once that advice is delivered to the Government, it would consider whether to implement the same having studied its merits and demerits.

Though Basil had not said about Sri Lanka’s seeking IMF advice, the media had misquoted him as saying so. This had prompted the Central Bank Governor Ajith Nivard Cabraal who is openly opposed to an IMF type bailout and believes in a homegrown package issues a Twitter message denying such request being made. Instead, what had been requested for had been routine technical advice on the establishment of a macro policy unit in the Ministry capable of analysing fiscal policy from a macro point of view. Governor Cabraal’s position was corroborated by IMF later in a reply to a question posed to it by French News Agency, AFP.

Is Central Bank being sidelined?

The type of policy analysis which this new unit is going to make is presently made by the Central Bank and this new development means that the Ministry does not want to listen to the Bank anymore and it wants to have its own capacity to do so. It seems that the Ministry of Finance is gradually keeping the Central Bank away from its policy advice role. This is not a salutary development because the Central Bank’s policy analysis covers the impact of fiscal policy on monetary policy and exchange rate policy as well. Without that input, it is unlikely that the Ministry of Finance could make prudent fiscal policy measures.

IMF’s general resources: Lending from non-using members to deficit members

Dhananath then explains in detail what type of financial assistance that Sri Lanka can get from IMF. They are all extended from the fund’s General Resource Account which is made up of a pool of currencies and reserve assets taken from the fully paid capital subscriptions of members known in IMF’s terminology as quotas. Hence, if Sri Lanka borrows from IMF, it is the money it has given to the Fund by way of capital if the borrowing is equal to its quota.

If the borrowing is more than the quota, which is the norm, it borrows in addition out of the capital of those members who have not used Fund’s resources. A prominent such member is USA which has provided capital to IMF but not borrowed from it. Hence, it is important for using members to have non-using members in the Fund, because, if all start using IMF money, it will soon run out of money and become bankrupt before the member countries.

Available funding lines for members

There are three such loan schemes available for Sri Lanka. One is called the Standby Facility under which the Fund remains by the side of the member country when it starts an IMF program that includes the implementation of an economic reform program. It is like when a patient is being administered a medication, the doctor remains ready to attend to any emergency by the side of his bed. If the country gets into trouble, IMF is ready to give further support by way of technical advice and other facilities.

The second is called the Extended Fund Facility which is a little more advanced than the previous one. Its repayment period is also longer. The third is the rapid finance facility under which the country can withdraw moneys from its share capital contribution which is known in IMF terminology as ab outright purchase. When the money so withdrawn is repaid, it is called repurchase.

Sri Lanka has been a user of IMF money

Sri Lanka has obtained IMF support on 16 occasions starting from 1965 though the country joined IMF as early as 1950. So, there had not been any attempt by the country at seeking IMF support during the first 15 years of its membership, though the country had had balance of payments difficulties during that period. The country had adopted a homegrown policy in the form of stringent import and exchange controls to resolve the balance of payments problems. When they were not successful, the Government of the day had decided to go for IMF support in 1965. Since then, in the next five decades, seeking IMF support had been a regular event in Sri Lanka.

NM’s advice to present-day Finance Ministry: Put your own house in order if IMF is shunned

There had been some interesting features about these IMF loans though Dhananath had not dug into them. One is that in two instances in 1971 and 1974, the left-wing Finance Minister Dr. N.M. Perera decided to seek loans from IMF to resolve the grave balance of payments issues. The first loan-a standby arrangement-amounting to $ 25.6 million had been fully utilised indicating the successful completion of the program. Of the second one amounting to $ 29.6 million, only $ 8.5 million had been disbursed, an indication that the program had midway been aborted. But what is important is NM’s justification of seeking IMF’s assistance. As quoted by Sri Lanka born economist Premachandra Athukorala in an article on IMF and Sri Lanka, NM had said, “We cannot brush aside and completely ignore these international institutions; we can repudiate their terms only if we are prepared to face the far-reaching distortions.” Further he had said: “The Government’s efforts to put its own house in order is not the result of IMF advice but is the obvious thing to do in the national interest” It behooves the present Monetary Board of the Central Bank to listen to NM’s wise counsel given some five decades ago.

Sri Lanka has not been a good borrower

The other feature is that out of those 16 occasions, Sri Lanka had completed them only on nine occasions. On seven occasions, they had been aborted midway giving an opportunity to IMF critics to claim that IMF programs had not delivered results in the past. But Athukorala in the article mentioned above had documented that of the nine occasions on which programs were fully completed, economic growth in the country had been higher than the growth it had got when the programs had been aborted. Hence, it is the Sri Lankan authorities who should be blamed and not the Fund or its programs.

Restructure debt first

As explained by Dhananath, when IMF plans to provide help to a country, it does a debt sustainability analysis. In that analysis, an important feature is to examine whether the country could borrow money from the market. The market here is the international financial markets in which the country concerned can issue sovereign bonds and raise money. If the country has lost access to market, the country should act beforehand to reduce the debt because IMF does not want that country to use its resources to repay such debt.

Sri Lanka cannot issue anymore international sovereign bonds because the ones that have been issued are traded at a huge discount and its ratings have been reduced to a very low level, the prior action which Sri Lanka should take to be eligible to seek IMF support is to reduce its foreign debt levels. Sri Lanka should therefore seek to reduce its foreign debt immediately by speaking to foreign investors if it is interested in seeking IMF support. But according to IMF experts, the Government should implement immediately a wide economic reform program.

India’s experiment with IMF

India’s leading policy economist Montek Singh Ahluwalia in an interview with Advocata’s Murtaza Jafferjee and Sarath Rajapatirana had opined that what is more important is to introduce economic reforms instead of just going to IMF.

The country should take tougher action than what IMF seeks from that country. This is exactly what NM had said in 1971 when he had sought IMF support. As quoted above, NM had said that it is in the interest of the country to introduce those reforms. Accordingly, Dhananath comes up with seven-fold reform program which Sri Lanka should introduce in its own interest.

Give cash subsidies to the deserving

The first is to support the poor with a cash transfer system. This is because it is the poor who are most adversely affected by a reform program. Though Dhananath had not elaborated on this, this cash transfer need not be direct subsidy given to them. Money in their hand could be improved by allowing them a better market access too. Another way is to remove the obstacles that stand in their way for accessing the market. The development of marketplaces, dissemination of information, introducing effective forward sale systems, educating them of basic legal and quality requirements, and connecting them to big companies through justifiable contract systems are some of them.

Reforming the public service a must

The second is to reform the public service to provide an efficient service to the public and reforming the public enterprises. An inefficient public service is a curse to business. It adds to their costs, reduces their operations, and eats up their valuable scarce resources. By way of an addition to what Dhananath has presented, two reform programs for the public service can be suggested. One is to keep them on continuous training and learning. The other is to introduce advanced information and communication technology to affect an efficiency improvement in the public service.

Have independent central bank

The third relates to the adoption of a prudent monetary and exchange rate policy by the central bank. To deliver this, it is necessary to make the Central Bank independent of political interferences. This writer addressed the issue of central bank independence in the 2018 Anniversary Oration of the Bank.

The practice of the Central Bank today has been to keep the exchange rate at Rs. 200 a dollar arbitrarily and artificially. It has spawned a vibrant black market on one side and created shortages in imported raw materials, on the other. This has disrupted the supply chain affecting smooth production processes and caused innumerable difficulties to businesses. This must go as one measure to reset the economy on the initiative of Sri Lanka and not as a policy prescription of the Fund.

Simplify the tax system

The fourth strategy involves reforming the tax system. There is a necessity for simplifying the tax system. Import duties should be reduced only to three duty rates. To improve other taxes, tax base of the income tax should be expanded. This strategy is essential today because the government has on its own through a wrong policy caused the government revenue to fall by about Rs. 500 billion a year. The reform should therefore necessarily involve restoring the tax system that had prevailed prior to 2019.

Trust the global economy

The fifth strategy requires the country to join the global economy seamlessly. This is because Sri Lanka with its low natural resource base cannot function independently and separately from the rest of the world to deliver prosperity to people. In fact, no country today can afford to do so. As such, Sri Lanka should abandon its domestic economy based economic policy and embrace global supply chains.

Make doing business easier

The sixth calls upon the Government to make doing business easier. For this, it is necessary deregulate the economy across the board and remove all obstacles for businesses, especially startups, to get into new enterprises.

Restructure the debt

The seventh is to study the ways of debt restructuring and introduce such restructuring programs. This is also the prior action which Sri Lanka should take if it decides to go to IMF for assistance.

Reset the economy if IMF is to be shunned

The message given by Dhananath is clear. Sri Lanka should introduce its own reform program, or reset the economy, as NM had said in 1971, if it is interested in seeking IMF support to get out of the present economic malaise. Without such resetting, even an IMF program will not work, and critics of IMF will start blaming the Fund and not the reckless domestic policymakers, for the policy failure.

Today without such IMF program and without resetting the economy, those who are responsible for the failure could be directly identified. In a way, it is a salutary development.

*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

  • 10
    0

    6.9 million didn’t care about competency ……… they only wanted an economist with the best “Sinhala Buddhist” credentials.

    They have got one now ………. https://www.youtube.com/watch?v=8qKm6qTFxok ……….. https://www.youtube.com/watch?v=J5fqLZ_kZ34

    Kaputas have hit the plane …….. and s**t has hit the fan! ……… seven brains seven fans …….. more than the usual ……….

    EE is looking for a bucket …….. There’s a hole in the bucket, dear Soma, dear a14455, ……….. So fix it dear EE, dear EE, dear EE,


    A kid is asking, if Americans (which ol’ Basil is) are saying Kaputas, why we have to go to all the trouble to learn English? …… We can go to America and talk Sinhala! …… Over to you California!

    If this trend continues ………Sinhala_Man will be out of work!

    Bloody Monty Python couldn’t have written the script!

    Only in the sunny isle of paradise!

    • 3
      0

      Dear nimal fernando,
      .
      This is not the right place to make a long comment on Education, but you’re correct.
      .
      The situation for the average Lankan is much worse than most realise. It’s not just English language; the desire to explore the basis on which we act has almost totally disappeared.
      .
      I know that there are more learned people than me around, but I know that I’m in a better position to judge than most.

    • 4
      0

      Dr. W A Wijewardena,

      It’s a very good article. Very well written. ………. And you are one of the very few Lankans who understands the economics of economics: the nitty gritty …………

      But are the economic problems of Lanka problems of economics …….. or problems of incompetence and corruption?

      The question is, how do you adapt sound economics to fit incompetency and corruption …….. and the stupidity and ignorance of the people the majority want/vote as their economic managers?

      You have given a sound prescription for a lesion in the foot …….. while the malady is a tumour in the collective “Sinhala Buddhists” brain.


      Without consulting Sumanadasa ……. I can predict with 100% certainty that your prescription won’t work ……. let alone be accepted/read/understood.

      The simple reason is, Basil’s/Rajapakses’ intentions are not economic solutions for the nation but looting ……….. and everything is set up just for that.

      Dr. W A Wijewardena, who is the better problem-identifier? A highly trained person like you …….. or a school-avoider pleb like me?

      Ah! common sense Dr. W A Wijewardena, common sense ……….. it’s elementary dear Dr. W A Wijewardena …………

  • 8
    1

    Sound advice. Pleasantly surprised by that quotation from NM of whom I now have a better image as a responsible economist.
    Thank you

  • 10
    0

    Doctor I sincerely thank you for your tireless attempts in trying
    to enlightem our retarded masses. But my concerns are soon pseudo Patriots Rajapaksas may tag you as Kottiya supporter just as they did to Sumanthiran.

  • 9
    0

    Mr Wijewardhana,
    please tell it clearly, -you were one of the highy level insiders to SLCB. The fact is that IMF would not respect SRILANKENs led by criminals today. So do entire EU countries. That is the reason why they paint the picture that they would not go to IMF.
    .
    Why is that facts are constantly being kept away from the PUNNAKKU dominated srilankens ?

  • 7
    0

    IMF always sets its conditions for lending money. Its up to recipient to ensure such conditions are conducive and palletable. You cannot have the cake and eat it.
    Yes the Central Bank and finance ministry should get their act together before going to IMF. NM was an honourable soul. Can we say the same for our incumbents. No is the definitive answer. These inept people and are only interested in saving their skin
    Srilanka needs urgently to look at its debts and come up with a long term solutions. You don’t expect IMF to do that for you

    • 5
      0

      Ratnam Nadarajah

      “NM was an honourable soul.”

      I am not so sure.

      • 1
        1

        Dear NV
        I stand corrected. That was my understaninding that NM did the right thing. He was not a cheater or a bigot in my view

        • 2
          0

          Ratnam, you are seriously mistaken!! NM was the leader of LSSP when they were part of the United Front government 70 – 77. LSSP fully supported to make Buddhism the state religion in the 1972 UF constitution which was the brainchild of his colleague, Colvin R De Silva. NM also supported 1973 legislation to implement the district allocation system to recruit university students. Both these steps were the main reasons that led Tamil militant organizations to take up arms, consequences of which I don’t have to explain further.

        • 2
          0

          Ratnam Nadarajah

          “He was not a cheater or a bigot in my view”

          He was not a bigot however when his long term comrade Colvin drafted the Constitution of 1972 he was in the cabinet. He did not stop the the inclusion of CHAPTER II – BUDDHISM, nor did he attempt to reverse language policy. Further more there was a ban on transporting rice to Jaffna peninsula. The price of rice according my elders skyrocketed. People could not afford three descent meals. When their MP’s complained about the rice price inflation in the parliament N M asked them to sell their Thali (gold chain worn on their wedding day) and pay for rice. I can go on. Let me stop here.

          Whom was he trying to please?

          He stop imports, including raw materials, components, machine tools, plant and machinery, know how, …. without proper planning. During his time he recruited planning staff with Pali, Sanskrit, Sinhala, Buddhism, graduates to man planning ministry.

          He was trying to please farmers therein the vote bank, punished industrialists, budding entrepreneurs, cooperative movement was politicised and ruined during his tenure at Finance Ministry. …. My Elders tell me he introduced demonetization hoping to bring in black money into the economy which failed because his rich cronies sent their men and women to exchange Rs 50 notes for smaller denomination.
          I can go on.

  • 11
    0

    Came across this in LNW:
    “FEBRUARY 21, 2022
    The Central Bank of Sri Lanka (CBSL) has instructed the state banks not to lend to the Ceylon Petroleum Corporation (CEYPETCO) beyond the prescribed credit limit, in a move to secure the stability of the state banks.
    The above instructions have been made considering the non-payment of a significant amount of debts obtained in the recent past and the financial condition of the CEYPETCO.
    The CBSL has also instructed the state banks to follow the same course of action with regard to other government bodies, which are incurring huge losses.”
    So what can CEYPETCO or other govt bodies, do.
    In this situation can even the IMF help ?

  • 1
    0

    “As such, Sri Lanka should abandon its domestic economy based economic policy and embrace global supply chains.”

    What global supply chains? Right now, they are doing global crypto and money laundering….and taking enormous energy off the electricity grid. But even that is not working.

    We need a good socialist domestic policy of 80% + 20% global social supply chain of whatever is available for the next 20 years.

    • 4
      0

      ramona grandma therese fernando

      “We need a good socialist domestic policy of 80% + 20% global social supply chain of whatever is available for the next 20 years”

      Please expand and explain.
      Be careful our man nimal fernando is watching you like an eagle.

      • 4
        0

        Native,
        Does Ramona have a North Korean green card?

        • 1
          0

          Hence the 20%.

        • 2
          0

          old codger

          “Does Ramona have a North Korean green card?”

          Don’t worry we will find our own domestic solution.

  • 2
    2

    For the Sri Lankan economy to improve and to lay a strong foundation, Cabraal has to be kicked out of his Governor position. I say this because he is the stumbling block in approaching IMF. There is a reason for it. Over the years, whenever he served as the Governor of Central Bank under the Rajapakse Family rule he has cooked the books (not only of the Central Bank but also of most of the government owned corporations and businesses) in order to show a rosy picture to the people. He knows well when he approaches IMF, the report that would be published by IMF would expose all these cookups. This is the main reason Cabraal does not want to approach IMF. Further, the Rajapakse Family is also scared to approach the IMF as they will also be exposed of their actions of jacking up prices of major projects to get “santhosams” from the Chinese. All in all first step should be to kick Cabal-Rala out of his seat and strip him of all the benefits he would receive for cooking up the books.

    • 1
      0

      Dear Buddhist1
      Re yr:
      “”For the Sri Lankan economy to improve…,Cabraal has to be kicked out of his Governor position”,
      I think I have just the solution.

      The Financial Times carried it on 10 Feb, but, it’s online only in the e-paper, so hardly legible.
      I’ll see if I can get it to you sometime. Manelf

      • 2
        0

        Manel

        You might find it from this link:
        https://dailyftepaper.pressreader.com/daily-ft/20220210

        • 1
          0

          Thank you, Native. I tried that site earlier today but it said not operating right now.
          I’ll try again now.

          • 1
            0

            Manel Fonseka

            Please click the link, then go to the bottom where you will find pages of the epaper listed, then click which page you want to open.
            I checked it now and it is working.

        • 1
          0

          Thank you, Native. I tried that site earlier today but it said not operating right now.
          I’ll try again now.

          Oh, sorry, I gave the wrong date it was 12 Feb.

          But, anyway, it’s in the same minuscule format in the e-paper. Not readable.

  • 1
    0

    Thank you, Native. I tried that site earlier today but it said not operating right now.
    I’ll try again now.

    Oh, sorry, I gave the wrong date it was 12 Feb.

    But, anyway, it’s in the same minuscule format in the e-paper. Not readable.

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