Sri Lanka: Reliability of IMF’s judgments and programme efficacy
Posted on August 2nd, 2016

by C. R. de Silva, Retired World Bank Official Courtesy The Island

IMF PROGRAM CONTEXT:

In two recent feature stories published in The Island, ( titled Sri Lanka – Case for $ 3-4.5 Billion in IMF Funding in May 2016 and Sri Lanka – Avoiding the Road to Greece? on 13 June 2016), some important issues were raised by this writer questioning the current IMF program assisting Sri Lanka and raising related issues for the government to consider.

More specifically, the above-mentioned articles raised the critical issue whether any kind of structural economic shift like a ‘lift-off’ of the economy, as forecast by the IMF, could even be conceived in the county’s dire economic and fiscal circumstances with such a modest inflow of IMF funds as $ 1.5 billion, doled out in six meagre tranches over a three-year period, given the country’s massive accumulated external debt and after satisfying a politically difficult, IMF-mandated reform program, which was inherently difficult to achieve in the current context of coalition unity pressures, and given the very radical and politically sensitive nature of some of the policy reforms the government was required to achieve.

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In summary, the questions posed in the previous stories were: Is too little IMF financial transfusion creating too high expectations given the goals the program set out to achieve? In the context of a reported government request for $ 3-4.5 billion in IMF relief, was there a justifiable case for a much larger IMF operation under the EFF, when compared to $ 350 billion bail-out for Greece?

A final substantive question was also raised in the articles about IMF procedures. Given fairly conclusive staff-level decisions which were publicly communicated to the Government, and also from IMF headquarters subsequent to the mission’s field work, almost no discretion was left to an 18-member Executive Board representing some 185 member countries to reach its own considered and objective decision in regard to the proposed IMF program in Sri Lanka.

As a result, IMF’s Executive Directors became a rubber stamp board ratifying publicly announced staff lending decisions, already communicated to the government, which had already begun to act on the recommended policy measures though the funding level was grossly inadequate to address the huge external debt burden without debt restructuring, and the policy measures themselves being quite controversial and politically difficult to achieve. The disastrous Greek saga is evidence that this is an inherently faulty procedure. The important point was also made that this procedure of the IMF varied radically from that in similar organizations such as the World Bank and the Asian Development Bank, where the Executive Board took the substantive decision to approve loans on management and staff proposals.

The discussion in the second published article mentioned above, namely Sri Lanka – Avoiding the Road to Greece? concluded with the question : where does the above IMF relief operation take Sri Lanka in the next months and years, given that the country’s critical current economic situation brought to the fore the IMF’s role in recent and ongoing crises in Greece, which continues to afflict another democratically elected Government in a more developed economy, in a country of only 11 million people which had received $ 350 billion in bail-outs from a troika of lenders, including principally, the IMF.

There, too, the country has lived way beyond its means, raised billions in foreign exchange by issuing bonds in every conceivable market, a strategy which became progressively more expensive in interest rate terms, causing the value of its currency to crash, leading to an inability to meet the demands of its external and domestic creditors, culminating in a run on its local banks, and a series of financial bail-outs by the IMF, the European Development Bank and Germany, its three principal sources of financial rescue.

Now, the time has come for the IMF’s role and program in Greece to be evaluated. Their fallout is very relevant and highly significant for Sri Lanka, where substantive issues have been publicly raised about the appropriateness of the size and substance of the IMF relief program, following the results of the bail-out for Greece implemented by the above-mentioned principal external creditors. What important lessons flow for less sophisticated, emerging market economies like Sri Lanka from the continuing Greek economic tragedy, and for a Sri Lankan Government which is implicitly following every IMF prescription placed before it ? What does the the IMF’s own independent department dedicated to evaluate the organization’s programs have to say about the IMF’s bailouts for Greece?

GREECE – INTERNAL AUDITOR’S

INDICTMENT OF IMF’S ROLE

The IMF’s Independent Evaluation Office (IEO) has issued a critical Report on the organization’s role in the economic crises in Greece, which makes the following points:

1. the IMF move to lend Greece more than normally permitted being an European country, raised eyebrows in the developing world where IMF’s assistance in crisis has been less flexible (eg. compare $ 1.5 billion to Sri Lanka over three years with $ 350 billion for Greece);

2. weaknesses in IMF’s decision-making process for Greece, created a precedent which was essentially repeated for Ireland and Portugal in crisis;

3. the IMF failed to achieve the necessary debt relief for a deeply-indebted country within the bail-out framework, which was critical to restore debt sustainability (eg. compare absence of IMF focus on debt restructuring for Sri Lanka, which would have relieved the current debt service burden);

4. by rushing to agree with EEC institutions not to restructure Greece’s massive debt, the IMF not only forfeited its independence (unable to change course when the Greece program stumbled early on), and lost its effectiveness and agility as an independent assessor and crisis manager, but also failed to lighten Greece’s financial burden;

5. therefore, while Greece’s debt restructuring was off the table at the very outset of the IMF program, the IMF did not push for it when the likelihood of program success increasingly came into doubt; debt restructuring became required later when early bail-outs failed;

6. the IMF-assisted programs in Greece (and Portugal) incorporated overly optimistic economic growth projections, and lessons from past crises were not applied (compare IMF forecast of a ‘lift-off’ or a major structural shift from the $ 1.5 billion EFF program in Sri Lanka);

7. the IMF always led by European Managing Directors (e.g: Camdessus, Strauss-Khan and now Lagarde, all French) was too embedded in European sensitivities and unable to make clear-eyed assessments of economic risks;

8. the IMF evaluation report held back from concluding that the management and staff bowed to political pressure from European partner institutions; but stressed that since the credibility of the IMF comes from staff technical competence and independence, the Managing Director must ensure that IMF technical work is protected from political influence. (To be continued)

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