The Sunday Times Economic Analysis

The Sunday Times Economic Analysis By the Economist

IMF policies: Ammunition for political protests
The multiplicity of conditions attached to the granting of IMF aid is not unexpected. There has been a growing expansion in such conditions over the years. National economic sovereignty has become a myth. Nations that have to rely on IMF aid must accept a broad range of conditions. A broad range of economic reforms or restructuring is a precondition for the IMF aid package of about US$ 517 million. Since the conditions laid down by the IMF could be difficult to implement there is a real risk that the final disbursement of aid could be only a fraction of the promised amount.

Among the required reforms is the privatisation or commercialisation of the People's Bank, the restructuring of loss-making public enterprises including in the words of the IMF " the unbundling" of the Electricity Board (CEB). Already the government has met the condition with respect to the privatisation of the Insurance Corporation of Sri Lanka.

The list of other enterprises to be privatised has been decided and agreed on with the government. This is clear from the statement of the IMF that says: "We have decided on the list of enterprises to be privatised in 2003 (in addition to the sale of SLIC and the bus companies). Key items include the sale of CPC assets and market network, sale of 8½ percent of government shares in Sri Lanka Telecom (SLT), the Hilton Colombo hotel, and CWE's retail business."

These are not the only envisaged reforms. A highly controversial issue would be the changes in labour legislation. The IMF states: " To increase labour market flexibility we will implement the recently enacted time-bound labour dispute settlement law, the redundancy compensatory formula and other laws relating to working conditions by April 2003."

The government is expected to phase out the 20 per cent import surcharge, simplify the tariff structure and reduce the import surcharge to 10 percent by January 2004, and eliminate it by January 2005. These changes are expected to be announced in the 2004 budget. There may be sound economic reasons for these reforms. In the case of some of the reforms there could be considerable controversy on broader economic and developmental grounds.

However it is not the economics of these reforms that are crucial. It is the perception of the people in general and particularly of the working classes and trade unions backed by political parties.The privatisation of some of these may not face intense resistance, but others will certainty result in political protests and political actions. The controversial question is whether the government would be able to proceed with these reforms. It is certainly giving ammunition to the opposition.

A government without a firm and substantial majority could face severe difficulties. The opposition parties may seize the opportunity to topple the government. That would perhaps end the Poverty Reduction and Growth Fund (PRGF) aid. It is not only these funds but other donor assistance could also be affected as many countries follow the IMF-World Bank lead. The IMF logic in placing these conditions is that these reforms are vital for economic growth. Without them they contend rapid growth is not possible. It is through the envisaged rapid growth that poverty is expected to be reduced.

No real dent in poverty is expected without such growth and no rapid growth is possible without the envisaged reforms. This is a position that may be described as a half-truth. Yes, there is no doubt that economic growth is the bedrock on which poverty could be reduced in poor countries. On the other hand, there is enough evidence on economic growth not necessarily leading to a significant reduction in poverty.

The kind of economic strategy proposed by the IMF often even increases hardships and poverty. The IMF itself admits this: " We recognize that some of the proposed policies that are committed to in this MEFP, such as public sector restructuring, may have short-term costs for the poor. The government is committed to taking countervailing measures, such as voluntary retirement schemes and a possible unemployment protection plan, to ameliorate the impact of policies on the poor."

Economic growth on the basis of the strategies adopted by the IMF could mean only a "trickling down" of the benefits of growth. That would be quite inadequate to reduce poverty of the magnitude we face in the country. The pertinent question to ask is whether the primary interest of the IMF is to change the country's economic structure to suit them or a genuine interest in the reduction of poverty. The general perception is that the IMF interest in poverty is mere rhetoric, the real intentions are perceived to be different.

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