Posted on February 27th, 2022


The history of the International Monetary Fund indicates that it was established (1944) when there was a crisis in the international financial system in the 1930s, France and associated countries attempted to devalue and revalue national currencies to gain trade advantages using the international financial system. At that time there was no international authority to control financial systems in individual countries. Many inappropriate decisions to penetrate the stability were taken and such behaviour invited the requirement of central control in the international financial system. The International Monetary Fund was a successful effort that was agreed upon by many countries. Since 1944 the IMF has been working to protect the financial system despite many issues, and the fund supported many countries including China and India with massive funds to resolve issues when they needed outside support. Small countries like Sri Lanka have countenanced about declining foreign and domestic value of the national currency unit the aim of Sri Lanka is to have a higher exchange rate for the national currency in contract to real value.  The problem has been associated with many issues and it is not the right way for blaming the IMF, it is a demand and supply related problem and the government policy needs to be set logically to manage a good equilibrium.

If Sri Lanka produces demanding high-quality products and services it would support competition and earn more foreign exchange and stabilise the exchange rate of the domestic currency unit. This is a theoretical aspect and many criticize this aspect because Sri Lanka has no financial power to compete with other countries. The exchange value of the national currency unit of Sri Lanka cannot quickly increase and it associates with many factors, the history of many hard currencies indicates that they had fluctuated during the past century and Sri Lanka cannot change that reality as politicians expect.     

The IMF was originated considering two proposals from Keynesian supporters and American view to establishing an international currency called Bancor. The establishment of the International Monetary Fund was successful and the Common currency idea has successfully been operating in the Eurozone since the year 2000, it seems that operating major currencies in five zones that the global financial system divided would be successful to reduce the current fluctuation and sharing the responsibility to maintain the stability of the domestic and foreign value of currencies. Why does Sri Lanka needs billions of foreign currency reserves if they aren’t supposed to use for demand and supply purpose, no economist has explained this point in detail and the media uses to talk about this without presenting logical examples.  

The current problem in many countries seems that they are in shortage of foreign currency and it is an issue that many countries have no appropriate controls to balance the available foreign currency reserves and the ability to generate reserves by exports of goods and services. Concerning this point, the product and service quality of many developing countries including Sri Lanka is questionable because these countries have no comparative product quality management and labour control and the application of technology in countries like Sri Lanka remain weaker, and political influences in Sri Lanka seems that indirectly associate with the foreign exchange management. If it exams the history of hard currency it cannot be seen that political parties and corrupt practices of political party supporters did not influence the management of economic and currency management. It was a liberal system and demand and supply of foreign currency incurred automatically.  

The main purpose of the IMF was to provide financial support for the balance of payment adjustment problems in member countries. The balance of payment in a country is defined as the difference between the real national income and expenditure.  If it deeply analyses the balance of payment in Sri Lanka, the trade balance of income and expenditure accounts and the capital account contributes to the gap between real national income and expenditure.

What is wrong with gaining financial support from the IMF, which provides support from various ways and such financial supports are subject to conditions. The IMF policy is to supervise how to use finance provided by it would not allow misusing as expected by politicians. The concern of IMF is to take the entire economy to the right pathway and it is related to macroeconomic factors and it is not simple as the politicians think.

Sri Lanka and many developing countries obtained financial support from the IMF and why Sri Lanka is reluctant to seek support from the IMF is not a dogma to understand. The main reason is the conditions imposed by the IMF which are not helping to misuse of funds by politicians. There is no way to provide financial support without conditions and the truth in Sri Lanka is even rural informal money lenders too insist on conditions for small lending volume and what is wrong with loan conditions for large amounts of funds. The funds that will obtain from the IMF are used for payments and the first condition will be the payment should go to a member country for goods or services.

The IMF may not agree with the inward-looking economic strategies and there may be the condition to follow outward-looking strategies that create many job opportunities and such conditions support expanding domestic and international trades. Since 1978, limited liberalization of trade created a market for rural products and services. Many Sri Lankans have gone for green pastures in foreign countries, in contrast to the expectation, they achieved limited gains and many social issues created in families.

The other significant condition would be the government should get away from public enterprises management incurring a huge loss and the pushing responsibility to private investors may be a condition. This condition is subject to the elimination of corruption which is a major issue in the country. After the privatization of public enterprises, the government must supervise the operation without influencing management.  The reality in Sri Lanka is after privatizing enterprises politicians wants to influence the management decision of enterprises. These are major reasons that the government reluctant to go for the IMF for financial supports.     

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