By Harsha Gunasena –
The present government before coming to the power stressed that they would not seek assistance from the International Monetary Fund (IMF). After coming to power, they have followed the same policy direction which the Central Bank also adhered to.
The main reason for not seeking assistance from the IMF is the conditions associated with the loans. According to the IMF, when a country borrows from them, its government agrees to adjust its economic policies to overcome the problems that led it to seek financial aid. These policy adjustments are conditions for IMF loans and serve to ensure that the country will be able to repay the IMF. This system of conditionality is designed to promote national ownership of strong and effective policies. The aim of IMF is to help the country concerned to rebuild their international reserves, stabilize their currencies, continue paying for imports, and restore conditions for strong economic growth, while correcting underlying problems.
The IMF provides loans to the countries who are members of the IMF to solve their balance of payment problems. On the part of the IMF, it is justified to impose the conditions to overcome the problems that led the country to seek financial aid and to ensure that the country will be able to repay the loan and on the part of the country also it should be justified. However, the issue is that some of these conditions are politically unattractive.
Democratic governments in Sri Lanka are mainly focused on the short-term popularity and winning the next election. It is true that there is no point of serving the country if they cannot win at least the next election. Especially when there is a strong opposition which is keen to get into power in whatever way possible, it is extremely difficult to implement the policies which would be beneficial to the country in the long run, and which would cause difficulties to the people in the short run.
On the other hand, there can be ideological differences of the government about the policy recommendations of the IMF. The government thinks that even though the demand for the dollars is higher than the supply of the same in the forex market due to the higher imports compared to lower exports, it can keep a constant exchange rate. That thinking goes against the thinking of the IMF. The Mahinda Rajapakse government was successful in doing so with the manipulation of foreign loan funds in the forex market except in two instances where the rupee crashed rapidly against the dollar. However, this government could not follow that mechanism due to short supply of foreign loans and deteriorated forex income due to pandemic. Hence it has resorted to pressing the commercial banks to keep arbitrary exchange rate resulting in the creation of a black market. The governor of the Central bank calls this process a “gentlemen’s agreement” with the commercial banks. The Commercial banks started to breach this so-called gentlemen’s agreement by charging additional amounts to dollar purchases in credit card transactions.
In the previous letters of intent given by the Sri Lankan governments to the IMF when obtaining assistance, signed by the then Finance Ministers and the Governors of the Central Bank, the Sri Lankan governments indicated to the IMF that their intention was fiscal consolidation by way of increasing the tax revenue and enhancing the tax base, reducing the subsidies provided through the government institutions and reducing the losses of government owned institutions such as Sri Lankan Airlines, Ceylon Petroleum Corporation and Ceylon Electricity Board.
This is the way of imposing conditions by the IMF and in fact constant budget deficits created by spending funds on unnecessary and unproductive way was one of the main reasons of the balance of payment crisis faced by Sri Lanka today since a part of those budget deficits were financed by foreign loans and some of them are comparatively on short term. The other reason is the deficit of the trade balance.
When the present government came into power, they have abandoned all these policy directions of IMF which were accepted by the previous government and the government prior to that under the president Mahinda Rajapakse.
That was the starting point of the economic crisis faced by the country today which was aggravated by the pandemic.
Subsidies to the people of Sri Lanka in most of the time goes to all including the affluent. If this is stopped and effective system of social security addressed to the needy persons can be introduced, government expenses on these subsidies can be reduced.
As a result of the government policy of not seeking the assistance of IMF, it had to obtain loans from friendly countries such as currency swaps which do not come with conditions. However, these loans are not sufficient and there are shortages of the imported goods in the market due to short supply of foreign exchange creating hardships to the people. The government indicated that there can be more import restrictions creating more hardships to the people. If the ultimate intention of the government of not seeking the assistance of the IMF is to avoid creating the hardships to the people eyeing the next election, it is ironic that the alternate policy decision of the government is also creating the same hardships to the people, again hampering the vote machine. Any person with common sense could have envisaged that.
The government is having one political advantage of restricting imports against streamlining the internal government finances. That is the ability to hoodwink the voters by putting forward the patriotic card. People who are the followers of the ideology of the present governments think that it is patriotic to manufacture the goods in Sri Lanka even at a higher cost. It was true that under the open economic policies the country imported the goods which were really not necessary, and which could have been manufactured in Sri Lanka but the quantum was not that material. We should have local manufactures who could compete in the international markets.
The European Union, which is the second largest export destination of Sri Lankan goods and with which Sri Lanka is having a favorable trade balance, expressed dissatisfaction of the import restrictions imposed by Sri Lanka. Apart from that Sri Lanka is having an issue of the continuation of GSP+ concessions offered by the EU.
Therefore, the policy direction of the government is suicidal to the government, people, and the country.
Sugandh / August 28, 2021
Appreciated Mr. Gunasena’s piece particularly wrt policy changes as conditions to IMF loans.
As for loans offered by our most eager best friend, seems comparatively we get gouged by the interest rates it charges!
Mahila / August 28, 2021
They are undoubtedly our great saviours