Economic Recovery

By Rusiripala Tennakoon –JANUARY 7, 2022

Rusiripala Tennakoon

My last article was to be continued covering the Economic Recovery program. Today this has become a hot topic discussed by many. Before we address the subject it would be prudent to take a look at the reference made by the World Bank Overview update of 7th Oct.2021 about Sri Lanka, quoted below.

“Growth is expected to recover to 3.3. percent in 2021, but the medium outlook is clouded by pre-existing macro-economic weaknesses and the economic scarring from the Covid-19 pandemic. Official reserves remain low relative to short term liabilities amid constrained market access. A severe foreign exchange shortage is exerting pressure on the exchange rate. Urgent policy measures are needed to address risks to debt sustainability and external stability.”

More recent developments point towards a worse gloomy situation. The CCPI (Colombo Consumer Price Index) rose beyond 9.0 percent in Nov/Dec with the inflation surrounding food items reaching 17.5 percent. There is a strong uncertainty about food security and households are concerned about running out of food. The increase in food prices and shortages of many essentials are adding to the rising inflation. The fuel increase affected after a long period of nearly two years has aggravated the living conditions as well as the general hardships in the day-to-day life. Central Bank increased the policy rates consequently raising both Standing Deposit Facility and Standing Lending Facility to 5.0 and 6.0 percent respectively in order to curb the inflationary pressure.

Foreign Reserves are used mainly to service the Debts within the available limits and the reserve position is becoming highly volatile with slowing down of remittances from overseas employed and reduced income from other sources such as the tourism sector. The depleting foreign reserves are causing further vulnerabilities making it imperative to resort to stringent Import restrictions.

It is in this context Urgent Policy measures are needed and takes the priority in addressing the growing uncertainties. Among the various proposals and suggestions made seeking assistance of International Agencies is considered as a basic necessity and as the bottom line of the solution.

Is IMF a ‘Crown of Thorns’?

The ongoing debate is centered mainly on two aspects. There is one school of thought that IMF will grant assistance only on conditionalities that will be imposed on the borrowing country. Such conditions according to the understanding of some have been and could be harmful and cause hardships to the people. The other view is, there is no need for us to subject ourselves to external conditions when we can resort to other methods of alleviating our difficulties without burdening the people. We are compelled to look at the pros and cons of both viewpoints in a balanced way.

Current Scenario

Dilemma about seeking IMF assistance seems to be the center of focus. Even in this highly decisive moment the decision makers appear to be vacillating between hope and fear in their choice of words as well as the conclusiveness of the matter when it comes to getting assistance from the IMF. The last public statement we heard coming from the Finance Minister was something that sounded like the proverbial “difficult to drink because it is hot but cannot throw away because it is milk”. His extremely fragile reference in response to a question from the media personnel when asked about the decision to go to IMF sounded evasive. He replied saying, “No, we haven’t decided to go to IMF, but we will start discussions with them” indicating that we are now in the process of considering whether to go or not.

Be that as it may, this shows either the decision makers are dilly-dallying or are trying to administer it in small, slow doses due to the prevailing highly canvassed antipathy against possible damaging effect it will have on the social welfare measures now implemented by the country. However, People appreciate firm decision making rather than wasting time, hesitating.

Historical background

Sri Lanka’s relationship with the IMF is nothing new. Since joining the IMF as a member country in August 1950, we have received 16 facilitations and the last standard loan we got from IMF was in June 2016. IMF approved a loan to the value of SDR 1.1 billion which was equal to US$1.5 Billion under the Extended Fund Facility with a repayment plan to be completed by 2028 beginning 2020. The lending arrangement was spread over a period of 36-months with the disbursement of the loan in six installments. In 2009 Sri Lanka obtained the highest amount as a loan from the IMF which was more than 2.5Billion US$ as a Stand-By arrangement.

Our record with the IMF is very clear and we have never defaulted or failed to repay our obligations to IMF. We have a member quota of 80 million SDR (equal to US$ 800 million) in the IMF as a member country which provides us a voting right of 0.14 On the IMF board of Governors. We have experienced difficulties with the compliance conditions on a few occasions such as the Compliance with the EFF facility of April 2003, which was due to the tsunami situation.

The most contentious issue about going to IMF is the conditionality of lending. There is also a fear, that the developed countries which have the final say in the FUND as its influential members, act discriminately when it comes to granting assistance and are less mindful about the basic welfare nature of our democratic system of government. Therefore, the conditions imposed at their initiative can be tyrannical to our governance structure. While we do not totally reject these views, we have to weigh the pros and cons in the context of the global economic trends and adjust ourselves to the mutual satisfaction of all parties. In a modern world with rapidly changing scenarios and emerging economic issues there will be sufficient space for reaching negotiated understandings among the stakeholders more freely.

Let us now take a look at these so- called draconian conditions imputed by many objecting to the IMF option. Generally, these conditions vary with each borrowing country depending on their individual status. But if we look at the conditions IMF imposed on us in our last borrowing program we can have a clear picture about the nature of those and whose interest are they trying to safeguard.

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