Sugath Kulatunga

In June, 2016 (IMF) approved a 36-month extended arrangement under the Extended Fund Facility (EFF) with Sri Lanka for an amount equivalent to US$1.5 billion,

The program aimed to provide a policy anchor for macroeconomic stability and structural reforms, while strengthening external resiliency in a challenging global environment” To achieve these objectives, the program envisaged the implementation of a set of reforms under six pillars:

(i) Fiscal consolidation;

(ii) Revenue mobilization;

(iii) Public financial management reform;

(iv) State enterprise reform;

(v) Transition to flexible inflation targeting under a flexible exchange rate regime; and

(vi) Reforms in the trade and investment regime.

In an article titled ‘The IMF In Sri Lanka: Bull in a China Shop’ in the Island News Paper of October 6, 2016, C. R. de Silva an ex-World Bank staffer wrote a scathing account pointing out the irrelevancy of IMF reforms in the context of the critical problems faced by the country. He mentioned the difference of opinion between Sri Lanka and IMF of an enhanced VAT level to 15% and to revise the income tax structure to bring direct and indirect taxes in a 20%/80% ratio, respectively.

CR was appalled that IMF ignored the foreign debt issue which stood at near $ 50 Billion and annual debt service payments at about $ 5 Billion. Several prominent economists had commented that this high level of foreign debt is not sustainable, and concluded that the country is already in a debt trap. According to the U.K.-based Jubilee Debt Campaign (JDC), a global movement demanding relief from the slavery of unjust debts”, countries like Sri Lanka with a foreign debt over 30% of GDP and debt service payments exceeding 15% of external revenue, have unsustainable foreign debt. JDC classifies Sri Lanka in a group of 22 countries already in a debt crisis, which include the Eurozone countries of GREECE, Portugal, Ireland, Spain and Cyprus, which have all at some point received the tender, loving care of IMF economic and financial panacea. Vide ‘ Sri Lanka – Avoiding the ‘Road to Greece’ in The Island of 13 June 2016.’ Sri Lanka should raise at the highest level of the IMF/World Bank Annual Meetings the question of restructuring its massive foreign debt, and stretching out periodic repayments to make them affordable, without waiting for last minute IMF intervention.

CR commented that the IMF’s very controversial judgement that the 3-year reform program under the EFF which it outlined for the Government, narrowly focused mainly on fiscal issues, will help the Government to achieve ‘lift off’ of the economy…”. For a middle income developing country at the lower ranges to achieve that kind of giant economic leap forward or ‘lift off’ to the next level of development, will require very much more planning, innovation, investment and structural change, than satisfaction of a few identified, mostly unpopular, policy reform measures, supported by a very modest $ 1.5 Billion EFF, doled out in $ 168 million tranche payments over a three-year period. He pointed out that revolutionary structural changes are called for in education curricula, vocational training and technical education to prepare the work force to be able to cope with coming information and communication technology (ICT) developments.”

IMF was looking at trees and missing the forest. The question is are they doing the same thing today in Sri Lanka?

A caustic comment made by insider Stiglitz, on the World Bank’s ‘investigations was that it  involves little more than close inspection of five-star hotels. It concludes with a meeting with a begging finance minister, who is handed a ‘restructuring agreement’ pre-drafted for ‘voluntary’ signature”. This may be relevant to IMF as well which is there to look after the interest of the creditors.

Government should follow the dictum Caveat emptor.