The IMF in Sri Lanka – Part V Signs of internal differences on IMF policies
Posted on February 21st, 2017

by Chanaka R. de Silva.

February 14, 2017, 8:43 am

IMF’s Own Research Views Change

Following the epochal research effort and conclusions arrived at by the World Bank in 1993 (set out in the previous section), motivated partly by the early ‘graduation’ or cut-off of Korea from World Bank’s lending in 1992 – having achieved surprisingly speedy per capita income growth and sustained prosperity with equity for its people – more than two decades had to transpire before some senior economists in the IMF have begun to question parts of the Washington Consensus, and therefore, IMF dogma, on which its development prescriptions are based. Three senior IMF economists, including a department director and a division chief, have recently committed their divergent views to writing in the IMF’s official quarterly publication, “Finance and Development”, in June 2016.

These significant departures from the standard IMF path Sri Lanka has been, and is now treading, may be summarized as follows: 1. Capital account liberalization and fiscal consolidation, or “austerity”, being policies to reduce fiscal deficits and levels of public debt, have three specific consequences: (a) there is no evidence of resulting increased economic growth; (b) increased inequality ensues prominently; and (c) such inequality inhibits the level and sustainability of growth. 2. There are “genuine hazards” of foreign financial flows to developing countries, especially portfolio investment and ‘hot’, or speculative inflows, which may result in greater economic volatility and increasing crisis frequencies; since 1980, 150 capital inflow surges were recorded by IMF in over 50 emerging economies, ending partly in financial crises and causing large declines in GNP output; 3. Financial openness has effects on distribution, and inequality intensifies when a crash occurs. (Now there is increasing IMF acceptance of capital controls to limit short-term inflows, which compound financial crises. Therefore, full capital inflow liberalization is not always an end-goal); 4. IMF is concerned with the pace of government’s reducing fiscal deficits – but too fast could derail economic recovery; 5. accompanying “austerity” policies (tax increases and expenditure cuts) generate substantial adverse welfare ‘costs’ – also hurts consumer demand, worsens employment, and increases unemployment; 6. Episodes of fiscal consolidation have been followed, on average, by GNP output drops rather than by expansion in GNP output; 7. Economic damage from greater inequality, associated with following the neo-liberal agenda, can be mitigated by increasing expenditure on education and training – expanding equality of opportunity; and 8. therefore, the bottom line is “no fixed agenda delivers good outcomes for all countries at all times. Policymakers, and institutions like the IMF that advise them, must be guided not by faith, but by evidence of what has worked” (Extracted from Ostry, Loungani and Furceri, “Neo-Liberalism Oversold?”, IMF’s Finance & Development, June, 2016).

Re-thinking IMF Management’s Views .

The views of these three senior IMF economists are not unique in that institution, although IMF staff now ‘dictating’ to Sri Lanka are trotting out the same-old-same-old, ineffective, unproductive theories. Maurice Obstfeld, the Chief Economist of the IMF currently in overall charge of IMF’s economics complex, states: “The global financial crisis (2007-8) led to a broad re-think of macroeconomic and financial policies in the global academic and policy communities…Nobody wants needless austerity. We are in favour of fiscal policies that support growth and equity over the long term. What those policies will be can differ from country to country, and from situation to situation…this requires us to recognize situations in which excessive budget cutting can be counter-productive to growth, equity and even fiscal sustainability goals…it is important always to consider the most vulnerable when planning fiscal adjustment. Of course, there are limits to the pain economies can or should sustain; so, in especially difficult cases we recommend debt re-profiling or debt reduction, which requires creditors to bear part of the cost of adjustment…capital inflow surges could have destabilizing effects…when the direction of capital flow reversed and money headed for the exits…(finally) changes in income and job distribution, many countries have addressed inadequately.” (IMF Survey : Evolution Not Revolution : Rethinking Policy at the IMF”, 2June2016).

Conclusion.

It is clear from the obvious thrust of the foregoing policy realities, that more than ‘reasonable doubt’ has been clearly cast at the numbers-driven, neo-liberal ideology leading to the slow road to unsustainable development, Sri Lanka is being goaded to follow by IMF staff, as a quid-pro-quo for a paltry ‘conditional commitment’ of $ 1.5 Billion EFF, one tiny drop in the vast ocean of Sri Lanka’s foreign debt obligations! IMF’s data-based prescriptions become still more incredible when serious doubt has been cast for decades by insider stories doubting the reliability and correctness of the basic economic data being churned out by the authorities, which the IMF staff keep analyzing ad infinitum, and pronouncing almost daily to the public, massaging every decimal point change in growth numbers, which have absolutely no impact on uplifting over the short- or even long-term – the lot of the middle and working classes, who are the country’s backbone, and suffering grievously under the severe strain of IMF-inflicted tax and allied neo-liberal, “austerity” fiscal policies.

This seemingly outrageous assertion about data unreliability, becomes very credible when a former top official of the Central Bank himself charged that “there was a deliberate attempt at massaging the main economic numbers painting a rosy picture about a fast-growing, vibrant economy”…and confirmed very recently that “…economic data was manipulated,…starting from growth numbers and then poverty and unemployment numbers. Growth was shown as a super achievement, but the actual growth was pretty much lower than what was publicized…foreign borrowing numbers were cooked and published in a special debt report by the Central Bank to show a rosy picture…the growth numbers had been massaged by the top economic policy makers to suit their petty objectives…” (W.A. Wijewardena, former Deputy Governor, Central Bank, in “Economy 2017 : The Alarming Signs should not be Ignored”, Daily FT, 27.12.2017). Since no contradiction has been issued on behalf of the authorities, this case too may be shelved, unless it is another alleged ‘scam’ amenable to “unspecified” action, following closed circuit snooping of suspected staff sources, now the prevailing drill – with suspected bond-related delinquents, whoever they may be, still very much in business, unaffected by the said “unspecified action”! There are many ways Sri Lanka loses tax payer funds.

Only the other day, Dr Saman Kelegama, Executive Director of IPS, reminded his listeners of a World Bank quote, as follows : “Why do statistics matter? In simple terms, they are the evidence on which policies are built. They help identify needs, set goals and monitor progress. Without good statistics, the development process is blind; policy makers cannot learn from their mistakes, the public cannot hold them accountable” (Keynote Address, Institute of Applied Statistics, Sri Lanka, 20.12.2016). The lesson is that the Government and the public may, therefore, be getting the wrong picture of the economy.

Consequently, it appears that the real story about the economy today is not as publicized in almost daily public IMF-staff pronouncements derived from suspect data, but as follows :”Sri Lanka is sitting on an economic volcano which is to erupt at any moment, destroying everything in the vicinity…the economic volcano is the deep economic crisis which the country has been going through since 2012…the symptoms took the form of a worsening external sector, unusual growth in money and credit, suppressed inflation, slow-down of economic growth and an undisciplined budget, causing the accumulation of public debt…The external sector is fragile today with mounting pressure for the rupee to depreciate against the dollar in 2017…Sri Lanka, without sufficient foreign exchange reserves, cannot avoid a massive depreciation of the rupee in 2017…The year 2017 and beyond is not rosy for Sri Lanka” (W, A, Wijewardena, as cited above). Latest reports indicate new money printing passing the Rupees 300 Billion mark to provide funds for local debt payments (increasing inflation over 4%, and rising), and that Rs 56 Billion equivalent in foreign funds have just exited the securities market. For a more comprehensive and accurate picture of the country’s economic condition, reference should be made to the “State of the Economy” Reports issued annually, the latest in 2016, by the government-supported and highly respected Institute of Policy Studies(IPS). Since external financing agencies are in the business of development, in a fast depleting client milieu, they are no longer the objective source of accurate conclusions, nor will they ‘rock’ the status quo too hard when addressing significant development issues, facing the potential risk of being cut out of business altogether, given the availability of easier alternative sources of funding, without stringent conditionality.

Is Sri Lanka Well on the ‘Road’ to Greece ?

In a previous feature story titled “Sri Lanka – Avoiding the ‘Road’ to Greece” in The Island of 13 June 2016, this writer analyzed important issues arising from the IMF-aided $ 1.5 Billion EFF program, which should be addressed to prevent Sri Lanka descending into the deep economic crisis now forecast by several local economists, and to avoid the disastrous fate Greece and its 11 million people have suffered, following seven years of IMF’s “intensive surveillance”, two IMF/EEC financial bail-outs amounting to over $ 350 Billion, and with one more (for $ 75 Billion?) currently in the works. What has hundreds of billions of borrowed dollars and continuing, gratuitous IMF advice since 2009 bought for Greece in 2016?

What follows is the consensus of well-informed Greece watchers and astute commentators : “It is the year (2016) of the slow grind…squeezed by the IMF and Germany…wages have fallen significantly…manufacturers hard hit by falling domestic sales and a desperate lack of bank credit to finance export drives…small producers are the worst hit by capital controls and the squeeze on bank liquidity, especially to import raw materials…Senior IMF officials have rejected claims it is seeking to impose more fiscal austerity on Greece…which is struggling to meet strict fiscal targets in a recession-scarred country, weary of austerity…main IMF worries are that Greece is pursuing policies ‘unfriendly to growth’ and that Greece’s debt is highly unsustainable…workers are protesting creditor demands for labour reform…Greece remains the cradle of European dysfunction…its multiple challenges seemingly buried under a tide of bailout cash…For the Greek drama’s failure to reach a denouement, blame the scriptwriters…the IMF and the nation’s Eurozone partners. Year after year, each contributes a farrago of actors’ lines and stage directors. Yet, the curtain never falls and the play drags interminably on”. (Extracted from ‘Greece’s New Year of Living Dangerously’, The Greek Crisis, 21 December 2016).

We end with the following, positive last thoughts: Should Sri Lanka revise its basic development strategies? If it does not, will Sri Lanka deserve the unfortunate fate of Greece? Should Sri Lanka, at a very minimum, negotiate foreign debt rescheduling – at the least, with China – to ease its debt repayment burdens? Is the IMF still assuring Sri Lanka of imminent, economic “take off”, following its $ 1.5 Billion EFF commitment? (See analysis by the writer in “Sri Lanka – Case for $ 3-4.5 Billion in IMF Funding in The Island of 13 May 2016)

(The writer is a member of the former C.C.S. He was later at World Bank Headquarters and responsible for program development and loan negotiations with Governments of several ‘miracle’ economies in East Asia Region, for some 20 years).

(Concluded)

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