Sri Lanka: Reliability of IMF’s judgments and programme efficacy
Posted on August 3rd, 2016

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

Continued from yesterday

The Telegraph (Business News) has just headlined a story “IMF admits disastrous love affair with the Euro and apologises for the Immolation of Greece”, and commented on the IMF’s negative evaluation scenario summarized above, as follows : “The IMF’s top staff misled their own Board, made a series of calamitous misjudgements on Greece, became euphoric cheerleaders for the Euro project, ignored warning signs of impending crisis, and collectively failed to grasp an elemental concept of currency theory…. This is the lacerating verdict of the IMF’s top watchdog on the Fund’s tangled political role in the eurozone debt crisis, the most damaging episode in the history of the Bretton Woods institutions”.

The IMF’s Independent Evaluation Report complained that “many documents were prepared outside established channels; written documentation on some sensitive matters could not be located” (hinting obliquely at IMF staff obstruction ). The Report described an IMF ‘culture of complacency’, prone to ‘superficial and mechanistic’ analysis, and traces a shocking breakdown in the governance of the IMF, leaving it unclear who is ultimately in charge of this extremely powerful organization. (Does this complaint of IMF’s superficial and mechanistic analysis imply the same policy prescriptions being applied mutatis mutandis to every country situation?)

The Telegraph in the same news report commented further, quite importantly, that the “IMF Executive Directors from Asia and Latin America are clearly incensed by the way European Union insiders used the Fund to rescue their own rich currency union and banking system…The three main bailouts for Greece, Portugal and Ireland were unprecedented in scale and character. The trio were each allowed to borrow over 2,000 percent of their allocated quota – more than three times the normal limit – and accounted for 80 percent of all lending by the IMF between 2011 and 2014…The IMF persistently played down the risks posed by ballooning current account deficits and the flood of capital pouring into the eurozone periphery, and neglected the danger of a ‘sudden stop’ in capital flows”. Is there a message of caution for Sri Lanka in these criticisms of the IMF ?

The Telegraph added: The harsh truth is that the bailouts sacrificed Greece in a ‘holding action’ to save the Euro and north European banks. Greece endured the traditional IMF shock of austerity, without the offsetting the IMF cure of debt relief and devaluation to restore viability…the country was forced to go through a staggering squeeze, equal to 11 percent of GDP over the first three years. This set off a self-feeding downward spiral. The worse it became, the more Greece was forced to cut – what the ex-Greek Finance Minister called ‘fiscal water-boarding’ – which exacerbated the (economic) contraction….The attempt to force an internal devaluation of 20 percent to 30 percent by means of deflationary wage cuts was self-defeating since it necessarily shrank the economic base and sent the debt trajectory spiralling upwards…the result is that nominal GDP ended 25 percent lower than the IMF’s projections, and unemployment soared to 25 percent instead of 15 percent as expected. “The magnitude of errors in Greek growth forecasts looks extraordinary” concluded the independent evaluation report. Therefore, how much value should Sri Lanka place on IMF judgements and economic projections ?

“The IMF strategy relied on forlorn hopes that the ‘confidence fairy’ would lift Greece out of this policy-induced nose-dive. ‘Highly optimistic’ plans to raise $ 50 billion from privatization sales came to little. Some assets did not even have a clear legal ownership. The chronic ‘lack of realism’ lasted until late-2011. By then the damage was done…The injustice is that the cost of the IMF -led bail-outs was switched to ordinary Greek citizens – the least able to support the burden – and it was never acknowledged that the true motive of the EU-IMF-Troika policy was to protect monetary union”. And, may be added, mostly European private bank creditors! (The Telegraph, Business News, 29July2016). So, the scary IMF path to Greece is now evident for all countries who want to follow it!

Greece: IMF Executive Board’s Misgivings at the Very Start.

IMF’s Executive Board meeting minutes from May 9, 2010 which approved the IMF rescue’s start in Greece, were only released five years later, ( that demonstrates Executive Directors’ powerlessness in the face of IMF staff ‘decision-making’ ), and now opens a revealing window into the Executive Directors’ pessimism and negativism about IMF staff judgements, which the Sri Lankan Government seems to consider biblically infallible.

Arvind Varma, the Director for India, fretted that the planned tightening of fiscal policy would become a ‘mammoth burden’ that could trigger a deflationary spiral of falling prices, falling employment and falling fiscal revenues that could eventually undermine the program itself. (In retrospect, It did!)

Pablo Pereira, the Director for Argentina, urged debt restructuring sooner rather than later. He reminisced that, on an earlier occasion in Argentina, similar IMF policies “had lead to catastrophic consequences…Beyond economic theories, there is an indisputable reality that cannot be contested : a debt that cannot be repaid will not be repaid without a strong period of sustainable growth”. (Why has the IMF failed to recommend restructuring/re-scheduling the country’s its massive external debt for Sri Lanka ?).

Rene Weber, the Director for Switzerland, complained that IMF staff assumptions about Greek economic growth “seem to be overly benign”. He exhorted IMF staff to prepare contingency scenarios…e.g. debt restructuring as a means to achieve fiscal sustainability and make private creditors shoulder some of the adjustment burden.

Paulo Batista, the Director for Brazil, used the term ‘Panglossian’ (meaning extreme or naive optimism) to “describe the IMF staff’s projection of a V-shaped economic recovery…growth may instead follow an L-shaped pattern, with a very sharp contraction of GDP and negligible economic recovery thereafter…the IMF program may not be seen as a rescue, as Greece will have to undergo a wrenching adjustment, but as a bail-out of Greece’s private debt-holders, mainly European financial institutions (

These are prophetic words, uttered six years ago by authority figures, which Sri Lanka’s policy makers and their advisors would do well to take note of.

As the Guardian newspaper headlined on January 4, 2016, “Greece’s economic crisis goes on like an odyssey without end : and the predicament of ordinary people is igniting fears of social unrest. The hardest, many feel, is yet to come…people are in really bad shape psychologically. They are incredibly scared that the next step will be banks taking away their homes. The government says all will be well, but the problem is no one believes it”.

Conclusion and Lessons Learned.

At this early stage of the IMF program, the expectation dies hard that Sri Lanka should arguably be spared the “endless odyssey” the IMF has inexorably caused the people and successive governments of Greece to suffer in the last six years. The IMF should proceed to lead a concerted global effort to restructure the country’s enormous and burdensome external debt, given the small size of Sri Lanka’s economy and its limited revenue stream, helping to ease the debt service burden by postponing interest and capital repayments falling due during the IMF’s program period of three years, without arm-twisting the Government into heaping greater and unsustainable financial burdens on the middle class and poor people of Sri Lanka, and pushing unattainable fiscal goals on the Government.

The IMF’s own internal audit/evaluation on Greece recommended that its Executive Board and Management “should reaffirm their commitment to accountability and transparency and the role of independent evaluation in fostering good governance”. Do the internal audit department’s unwritten words here carry a message of extreme caution for beneficiary governments and people of IMF’s questionable bounty, and to watch out for the unexpected and surprising end-results ?

As my previously published article on Greece and the IMF concluded, ‘what important lessons flow for less sophisticated developing countries like Sri Lanka from the continuing Greek tragedy ? Objective, sincere and effective prescriptions for policy initiatives and advice are hard to come by in the currently very complex and globalized world. Today, money lenders, by any other name, have to safeguard the continuum of their own business interests in a shrinking client milieu, especially in booming Asia, where countries in trouble, seeking financial rescue, are few and far between’.

Motivations vary with the lender and the special country circumstance as proven in Greece, and therefore, caveat emptor!. The more circumspect and self-reliant our policy makers become, and we make our own momentous decisions with the interests of the country as the predominant and only objective, the economic future of Sri Lanka will be more assured and the people will reap the whirlwind for generations to come. Concluded

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