Last week the IMF warned that the world economy will shrink for the first time in decades since the emergence of the worst economic crisis - the ‘Great Depression’.
The warning from the Fund came just as the G20 summit, made up of the world’s 20 most powerful countries, voted on a $1 trillion package to the IMF to bail out countries in distress. Much of it may come without ‘too much’ conditions, international economists have said.
The G20 outcome will most likely improve Sri Lanka’s chances of getting the $1.9 billion request without much of a fuss after an IMF team ended its review mission in Colombo last week.
But the debate is intensifying over the loan and whether Sri Lanka’s debt will worsen, or whether conditions will be attached to it despite what the Fund articulates ‘on paper’.
According to Central Bank’s 2008 report, the country’s total external debt plus liabilities stood at Rs 2 trillion ($17 billion) by end-December 2008. Economists say the total debt is around 80% of GDP - 50% from domestic borrowings and 50% from foreign loans.
Opposition parliamentarians have accused the government of increasing the external debt essentially by resorting to costly foreign commercial borrowings in the past few years, a charge rejected by the authorities. The decision to shift to foreign borrowing follows the IMF ending its Sri Lanka programme in early 2007 and no other recourse to cheap funds.
The country’s economic crisis is worsening, particularly on the balance of payments front; government expenditure is rising and revenue is falling, which is evident in the plan to increase taxes, as reported in this newspaper.
The warning of a shrinking global economy this year by the IMF could see Sri Lanka’s economy growing by 2.5 % to 3% in 2009 in a ‘worst case scenario’, as stated by Central Bank Governor Ajith Nivard Cabraal.
Objections to the IMF loan is coming in different ways; some not entirely opposed to the loan but saying there must be some kind of conditions to ensure the money is well spent by the government or the Central Bank while others say that the loan will add to the debt burden.
In Sri Lanka, although it is said that IMF loans are for balance of payments which is the requirement, the money is often spent elsewhere as seen in recent times. There are very few checks and balances and that is what will most likely happen here..
The IMF in the present global crisis should not impose conditions on countries to secure a standby facility as that would be unfair since most of the problems have been created externally and seeping into the economies of poor countries. Nevertheless there needs to be some pressure and ‘muscle’ to ensure that these funds are put to good use and that government cuts huge spending (large cabinet, large government) and doesn’t reduce budgets in health, education and social welfare.
Accountability in spending is required and like it or not, the IMF can ensure this. But not all groups in Sri Lanka are in favour of this ‘inteference’ – the JHU, JVP and civil society groups in particular.
Sarath Fernando, a vociferous and veteran campaigner for people’s rights in Sri Lanka, sees some recent developments like the passage of the Electricity Bill and a new drinking water and sanitation policy which allows private sector involvement as an indication that the government was willing to bow to the wishes of the IMF, as these reforms are similar to what has been requested earlier under loan agreements.
Mr Fernando also says the decision to go back to the IMF is a serious turnaround by a government that had rejected the policies of the IMF. “We are seriously alarmed at this trend of the government going back to IMF loans and endangering the possibility of accepting destructive conditionalities,” he said.
It has also been pointed out that some of the foreign loans recently secured by the Central Bank could be ‘illegal’ – particularly the HSBC bond issue – as no parliamentary sanction was sought.
UNP MP Kabir Hashim says that the Central Bank has some explaining to do about the conditions of the IMF loan on which parliament is yet to be properly briefed. He says there is a huge waste of funds like Mihin Air for example which will eventually swallow Rs 9 billion through Treasury payments. “The magnitude of the foreign exchange crisis is hidden -- not much is known. The IMF team should have been allowed to meet coalition partners of government (JVP and JHU),” he said, adding that this crisis is a home-grown one and mainly due to high spending. He also raised the spectre of IMF conditions already happening like the privatisation of higher medical education with a private medical college coming up, water bills rising and devaluation of the rupee taking place.
He believes the government will get the IMF money with much less conditions than before – as many countries are struggling - but also argues that some pressure needs to brought on to reduce excessive spending. While a lot of focus is on the final decision by the IMF board which would be around mid to end April, another question being asked is whether the Fund will re-open its Colombo office to ensure ‘better supervision of the credit facility’. |
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