THE IMF IN SRI LANKA – PART II -Sri Lanka: IMF-Directed, Slow Development Strategy
Posted on February 21st, 2017

by Chanaka R. De Silva,Ex-World Bank (The writer, a member of the former C.C.S. was later a senior professional at World Bank Headquarters in Washington D.C. for three decades).

February 9, 2017, 9:16 pm

(“The IMF in Sri Lanka – Part I” – Special Report – appeared above.)

Sri Lanka: IMF’s Economic Philosophy

The International Monetary Fund (IMF) has closely monitored Sri Lanka’s economic development during the last two decades and has also made a $ 5.2 billion loan available from the Stand-by Facility several years ago. Now, IMF has made a commitment of about $ 1.5 Billion through an Extended Fund Facility to Sri Lanka in June 2016, which will be disbursed in half-yearly tranches of about $ 162 Million over three years, on evidence of the Government of Sri Lanka’s good economic performance, meaning satisfaction of specific agreed conditions, which are pretty standard hurdles most developing country governments have to jump over, when they fall into serious balance of payments (BOP) crisis – a euphemism which economists use to denote near country bankruptcy – and are compelled to seek an IMF bail-out as a last resort.

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The onerous and unpopular, standardized conditions, to be performed to the satisfaction of the IMF during its continuous “intensive surveillance”, which all IMF beneficiaries are subjected to, consists of the recipient country having to build up its economy on the very same neo-liberal pillars of economic policy on which the so-called Washington Consensus (between the IMF, U.S. Treasury and originally, the World Bank as well) was built in the heyday of ‘Globalization’ in the 1980s and ‘90s, as the panacea for all economic ills; and applied without much variation, from country to country, in furtherance of the IMF’s macroeconomic ideology – which invariably included: higher taxes to strengthen government revenues; fiscal consolidation through greater discipline, expressed by narrowing existing budgetary deficits, through public financial management (and by reducing government expenditure, inter alia, by cutting welfare entitlements and government subsidies); in one word, “austerity”; enhancing monetary policy – (controlling inflation – if necessary by tightening monetary policy, which generally means increasing interest rates); state-owned enterprise (SOE) reform through privatization, preferably to foreign buyers, and euphemistically termed PPPs in Sri Lanka (public private partnerships), which very often entail the government offering for long periods, very major portions of equity for debt owed by the country; strong foreign reserves, if necessary, by Central Bank’s foreign currency purchases; exchange rate flexibility, allowing the Rupee to float and for market forces to determine exchange rate levels; relaxation or abolition of foreign exchange controls, (even in foreign exchange scarce situations, as in Sri Lanka); elimination of utility and production subsidies; liberalization of factor markets, particularly land ownership, mainly to ease the investment climate for foreign direct investment (FDI); finding resolution mechanisms for distressed financial institutions; incentivized foreign investment in the government securities market; and policies to reduce foreign debt; development of better infrastructure to stimulate more private (including foreign) direct investment (FDI); and finally, capacity (institutional) development to ensure success of Sri Lanka’s economic reform program with IMF technical assistance (from the only people who know how to carry out these numerous policies).

On November 19, 2016, the Board of Executive Directors of the IMF (in practice, more a rubber stamp for ratifying staff decisions already made in the field), met and having reviewed reform progress made after the disbursement of the first tranche of about $ 162 million under the $ 1.5 Billion IMF Extended Fund Facility, expressed “broad satisfaction” that, following the rough lines of IMF staff’s policy prescriptions, which have been scrupulously adopted by the Government, Sri Lanka’s “macroeconomic conditions have begun to stabilize, inflation has trended down, and the BOP has improved; fiscal performance has been encouraging, higher value added tax (VAT) will help boost revenues, the 2017 budget proposals will help to boost government revenues through revenue mobilization, the new Inland Revenue Act should result in a more efficient, broad-based and transparent tax system, foreign reserves will be built up through outright (dollar) purchases, while allowing greater exchange rate flexibility, and that reforms will be undertaken to enhance governance and oversight of SOEs, which is critical”. In summary, Sri Lanka had committed itself to all the attributes of conventional IMF policy dogma, detailed earlier.

IMF Staff’s Persistent, Media Megaphone

Since the last IMF review mission to Sri Lanka, and the change in staff leadership, the modus operandi of “intensive surveillance” to which this country is being subjected, appears to have changed materially, and the people of Sri Lanka are being served an almost daily stream of newspaper headlines demonstrating in no uncertain terms, through a very loud megaphone, unlike at any other time or place, who is in charge of economic policymaking here, far exceeding the IMF’s usual periodic supportive, almost ‘invisible’ monitoring role during an EFF disbursement period, giving political elements in the country the welcome opportunity to complain that Sri Lanka’s sovereignty has been seriously compromised, and the IMF is directing economic affairs, with the Government’s role reduced to a subordinate and non-discretionary one of merely carrying out detailed IMF policy instructions – certainly not the election mandate. The evidence for these conclusions are as follows:

1. The news headline on a Sunday, states “IMF: Sri Lanka faces currency risk on debt servicing”, due to vulnerabilities linked to inadequate reserves (then $5.65 Billion) and currency depreciation by 3.1%.(Sunday Island Business, 11 December 2016). On the very same day, another headline read: “2016 fiscal targets within reach, despite VAT delay, says IMF”(Sunday Business Observer,11Dec2016). (Comment: however, the “currency risk” is a direct outcome of IMF insistence on market determined rupee value, which is expected to tumble further in 2007, especially with expected periodic U.S. rate increases).

2. On December 14, 2016 the news headline read “IMF TELLS Government to Wind Down Forex Swaps”, with detailed IMF instructions; WARNS swaps open a new front of vulnerability, wants reserves grown from direct foreign exchange purchases; swaps could be gradually reduced to 0%; IMF calls on Central Bank to be ready for possible policy tightening in 2017; IMF wants a flexible exchange rate and Inflation targeting; “IMF staff team head Jaewoo Lee talking to reporters … WARNED that Sri Lanka should avoid opening up a fresh front of vulnerability given its high debt and other macroeconomic challenges…He WARNED that credit growth still remained high…he INSISTED there was a need to strengthen…etc”.(Verbatim Headline in DailyFT,14 December 2016).

3. On the very same day, another newspaper headlined in a front page Business Report: “IMF cuts growth forecasts for Sri Lanka on external volatilities”; expresses concerns over falling reserves; urges authorities to act swiftly to fend off vulnerabilities – the mission leader referred to was “addressing the Sri Lankan Press from Washington D.C. via live teleconferencing. (DMBusiness,14 December 2016). On the same day, this report also carried a double column, close-up photo of the responsible working-level IMF staff member(CeylonFT, 14 December 2016).

4. On the next day December 15, in another headlined front page story “IMF calls for faster structural reforms to keep program on track”; IMF says strong political commitment and sustained actions will be instrumental in advancing reforms; progress in fiscal structural reforms is a bit slower than had been originally intended – IMF. (DM Business, 15December2016).

5. On another Sunday, 18 December 2016, a major headline cautioned: “IMF “WARNS of impending challenges against Sri Lanka’s economic reforms”….and that “the political challenge of tax reforms will remain a policy risk”. In addition, the IMF found that the Central Bank Monetary Law Act falls short of international practices, especially in the area of the Central Bank’s autonomy…IMF mission chief disclosed that economic growth would be 4.5% and 4.8% for 2016 and 2017…”(BusinessTimes, 18 December 2016).

6. On the very same Sunday, another headline – “Fifteen Finance Companies in Trouble: IMF;”…the IMF revealed that out of the registered 46, fifteen presently facing liquidity issues, with six at a high level of distress with non-performing loans ranging from 50 to 90%, according to the IMF in a recent staff report completed on 4 November 2016. (Sunday Island/Business,18December2016).

7. On December 29, a banner headline read “IMF calls for stronger financial sector supervision and regulation” and added that IMF technical assistance on this subject “could be forthcoming”, since the recent rapid growth seen in credit has slightly lowered the capital adequacy ratios (CARs) of banks and finance companies. This news supplemented by astonishingly detailed data published on CARs was attributed to IMF Mission Chief Jaewoo Lee from the same live teleconferencing event referred to earlier. (DM Business, 29.12.2016)

IMF Protocol – Issues.

Preliminary, but significant issues for Sri Lanka, that arise are: In the writer’s long experience, this sort of IMF-public conduct is unprecedented; in-your-face, near ‘intimidation’ of a member government is unknown in Bretton Woods institutional history. Do IMF staff have the absolute freedom to communicate directly with the public, sensitive data on the Sri Lankan economy given to the institution in confidence? Have these IMF staff judgements, which substantively differ from the Press Release of December 9 of the Executive Directors’ meeting dated 19 November, just three weeks earlier, been first conveyed to the highest levels of the government? Should the Sri Lankan authorities believe the Executive Directors’ “broad satisfaction” with economic progress or the IMF staff’s very critical, but needlessly overt, contrary public declarations? What is the governing IMF protocol on this issue of direct contacts with the press in beneficiary countries, which can be misused by detractors to criticize the policy actions of the government? Why is this level of minute detail on the economy, (such as decimal point changes in growth forecasts, which could – and may – turn out wrong, anyway) and politically sensitive policy actions, important for the public to know – from the IMF? Should publicity on such data not be at the Government’s sole discretion to release, rather than IMF’s primary and daily business to spew out? Why is the IMF staff taking this adventurous path to brassy publicity, especially about adverse economic news derived from government data, and especially judgements about political risk, forbidden ground for IMF/WB staff, if the IMF, an external agency, is only an economic advisor to the Government, which is its legitimate role? The writer believes that it is the height of absurdity, for IMF staff to even presume to WARN a respected member government in good standing, of the political risk of tax reforms, which the IMF itself is insisting on, in a specific time frame. Politics is definitely not the concern of any external financing agency!

It was entrenched policy at the Bretton Woods institutions that the sovereignty of member governments and confidentiality of sensitive government data should be respected unreservedly, in every single staff encounter with client governments. This writer wishes to record here his vivid recollection that during the transformational and eventful Presidency of the World Bank by the late Robert S. McNamara (1968-1992), a Department Director was eased out for giving unauthorized publicity in a newspaper interview about the Bank’s role (or absence of it) in a certain member country in Asia. This incident testifies to the strict preservation of country confidences entrusted to a financing institution of which the country is a respected member and shareholder. Staff used to know they flout this code of conduct at their own peril, because it ‘brings the institution into disrepute’, unless codes of conduct have radically changed for the worse, at the risk of the IMF losing still more clients.

These important protocol issues are raised in the context of the notorious public perception of the IMF as an interfering institution which financially burdens the middle and working classes, not only in Sri Lanka but also in other financially beleaguered countries. These highly public IMF news pronouncements corroborate the perception that it is the IMF that is causing cost of living increases, impacting large sections of the people, by compelling the authorities to adopt politically unpopular policies, not in the country’s best long-term interests. Only the other day, a former senior government official wrote: “These days not only foreign experts but also the IMF carry out clandestine operations to ensure that we will remain stuck in debt. The IMF told us to import freely, use foreign exchange freely and gave us loans…Aid now comes to our country to make us more indebted, so that our economy would never recover”. (The Island, Opinion,23Dec2016). Such popular perceptions die hard, and are well justified by recent local events!

In the writer’s 30 year experience at World Bank headquarters, direct staff contacts with the press were frowned upon by senior management of both agencies, since it could have the direct consequence of embarrassing the client Government politically, quite apart from presenting the awkward spectacle of an international organization, invited as a guest to the country and given access to confidential data, appearing to override the accepted and unquestioned sovereignty of countries in which the IMF and World Bank operate, especially when such staff are critical of policy actions or lack thereof, directly speaking to the people who elected the government, through the free media. Then the IMF and its staff (with their photographs in the newspapers) become the headlined main story, and not the travails of the country they have been invited to advise, which borders on outright neo-colonialism in its very worst manifestation.

Finally, it should be pointed out that protocol problems with the current IMF staff review missions started in September, 2016 but with outright inaction by the authorities at both ends, have now visibly aggravated as seen from the above (See IMF in Sri Lanka: ‘Bull in a China Shop’ Syndrome, The Island, 7 October 2016). Such IMF inaction at the top, on staff conduct and judgements, sometimes mildly critical but always indecisive, will be perpetuated by a passive, laid-back IMF Board of so-called ‘Executive Directors’, who have watched helplessly, after endorsing wrong staff economic forecasts and reckless judgements on Greece for seven years, and seen a Western, OECD member country borrow billions of dollars, but go down the tubes, and into one catastrophe after another (see “Reliability of IMF Judgements and Program Efficacy”, published in The Island on 3-4 August, 2016), evoking no comment from the IMF.

Policy Issues

On a more substantive note, this progression of events also lays bare the stark divide between the Executive Board’s supportive and favourable views on Sri Lanka on November 19, 2016 and the IMF staff’s critical judgements barely three weeks later, which overtly erodes the credibility of the IMF as a responsible financial institution, charged with the highly responsible duty of advising on policies affecting millions of people, which have made some countries come a cropper like Argentina and Mexico in the past, and lately Greece, which is still reeling from adopting IMF prescriptions (See Sri Lanka: Avoiding the Road to Greece, The Island, 13 June 2016). The financial plight of Greece today is paraphrased in the final paragraphs of this series of articles.

The substantive issues that also arise in relation to the course of extensive policy actions, explicitly or implicitly agreed by Sri Lanka with the IMF, by signing on to receive a bail-out, are: Why has the IMF not alerted Sri Lanka that its foreign debt level is unsustainable, especially given that commercial and non-concessionary borrowing now exceeds 70% of that debt? Government announcement of a proposed new borrowing of $ 1 Billion in a ‘foreign currency term facility’ only aggravates the stormy horizon in prospect; while it was reported (without being contradicted), that the ‘Economic Council’ shot down an offer of $ 1.8 Billion, in an interest-free loan from Iran for oil refinery expansion – for yet unexplained reasons?

Why has the IMF not advised the Government to seek debt rescheduling to ease unaffordable interest and loan amortization payments, especially of the $ 8 Billion debt to China? One possible explanation, advanced by some, is that the IMF is waiting for a worsening of Sri Lanka’s BOP crisis, by approving only a paltry commitment of funds, so that a second, larger bail-out, with even more onerous conditionality, will become inevitable. A provocative viewpoint!

At what cost to the people of this country has the government agreed to carry out IMF diktats on consumer taxes in pursuance of an unproductive, neo-liberal set of economic philosophy and policy fundamentals, which have proved to be disastrous for some IMF-beneficiary, developing countries in the past, as already alluded to?

Will these agreed actions not implicitly result in the impoverishment of the country’s middle and working classes, with 40% of the people already living under the poverty line and a reported 25% youth unemployment, in the course of further enriching a national and global elite, among whom are multinational companies and foreign direct investors, whose role is being welcomed? In this respect, the World Bank’s just approved IDA credit of $ 75 Million, to upgrade welfare programs and to help improve the equity, efficiency and transparency of the social safety net, is to be applauded as addressing Sri Lanka’s highest priority issue. Likewise, ADB’s recent generous assistance to upgrade the power distribution system of the country is noteworthy, as prospective brown-outs are in the offing, in a country expecting to mobilize $ 2.5 Billion in FDI in 2017.

Does not youth unemployment at that 25% level referred to, represent a ticking time bomb, even before IMF-dictated, increased VAT and higher cell phone charges, directly resulting in majot cost of living increases, affecting a broad cross-section of the population, kicked in on November 1, 2016 ?; finally, and – Most importantly, has Sri Lanka probed how other developing countries in East Asia Region adopted quite markedly different economic policies to those of the IMF and achieved more speedy and broad-based sustainable development to higher standards of living for the large mass of their people?,

In the paragraphs that follow, it is proposed to present arguments for, and evidence of, this innovative strategy of the “Development State” that has proved much more effective than progress under IMF-dictated slow-paced, economic reform programs, and made those countries’ ‘miracle’ or tiger economies, which reached prosperity, in a much speedier time-frame, with equity for all – a first in development history.

 

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