Role of World Bank, IMF challenged; new lenders emerge

By Anthony Motha

The 1990s were marked by a series of crises that posed a challenge to the international financial and monetary system.

These crises made it obvious that international capital flows bring concomitant risks, besides the visible benefits.

The relationship between countries and international financial institutions (IFIs) has more substantial effects on the changing nature of state sovereignty in the developing world.

This week, 'Aid and Sovereignty: Role of International Financial Institutions in Developing Countries' was the subject of a panel discussion at the Bandaranaike Centre for International Studies.

In the context of globalization, Dr M Ganeshamoorthy, Department of Economics, University of Colombo, described economic sovereignty as "the ability of a state to control its own economy in response to its own needs".

Dr Ganeshamoorthy provided a litmus test of whether a nation is economically sovereign: "It should keep its own currency; it should trade with whomever it chooses to; it should control imports and exports; and it should regulate its currency to protect against speculation, if necessary."

By that framework, he points out, the introduction of the Euro was not compatible with the principle of economic sovereignty. He describes the tendency of World Bank, IMF and WTO to get increasingly and extensively involved in the domestic economic affairs of its members as a kind of 'neo-colonialism'.

Prof. Nira Wickramasinghe, Department of International Relations, University of Colombo, delivered a message replete with events from history. She questioned the relevance of IFIs and examined the evolution of their roles.

Tracing the history of IFIs, she said, "Since the late 1970s, they have provided loans to support economic reforms – currency, exchange and short-term balance of payment." That role is being challenged, however, with other countries (like China, for Asia ) taking on the mantle of lender and developer.

"Aid budgets are being spent on overpriced consultants instead of on real projects," Prof. Wickramasinghe said.

Providing the example of education in Sri Lanka, she contrasted the 'so much money pumped in' resulting in 'declining levels of knowledge of university entrants'. Taking issue, Harsha de Silva, Lead Economist, LIRNEasia, asked, "If 20,000 teachers are absent on a daily basis, is that the World Bank's fault?"

In his presentation, de Silva said, "We do not have the right to demand aid.

If we are asking for aid, reasonable conditions are neither bad nor wrong."

Highlighting the need for proper post-sanction management of aid, he quipped, "Thereafter, whether I buy BMWs and my citizens starve to death is a separate question."

De Silva pointed out that IMF has clearly indicated that its aid is conditional and is granted "provided that the country is implementing an adequate programme of policy adjustments".

Turning the mirror inward, de Silva said, "The only available option to protect the sovereignty of our country is for the state to borrow less and let private investments flow in… When foreign direct investment comes, you get advanced technology also," which is not necessarily the case when you get aid.

Curb inflation
A good economist is a lot like inflation – difficult to keep down. And Harsha de Silva, Lead Economist, LIRNEasia, was as irrepressible as they come when The Sunday Times FT spoke to him on the sidelines of a public event.

During de Silva's presentation earlier, he had highlighted a graph indicating a high correlation between inflation and the Central Bank's (CBSL) net credit to government. That represents extra money that was printed, he explained, which resulted in inflation.
In Zimbabwe, inflation rockets skyward at the incredible rate of 3,700% per annum. "In such an economy, it is more appropriate to measure inflation by the day," quips de Silva. While Sri Lanka's inflation – at 16% - seems tame in comparison, it is still the country's economic enemy number one.

"Prices have been going up because of irresponsible printing of money by the CBSL," says de Silva. "Since January, they have stopped printing money because they were forced to.

The good news is that if printing money pushes up inflation, stopping it will bring it down as fast. That will happen "if Cabraal and crowd walk the talk", says de Silva.

Explaining that monetary policy has also been tightened, de Silva says, "There are two things CBSL can do to reduce inflation: stop printing money – which they have done – and increase interest rates – which they are now doing."

The flip side of the coin is that borrowings are becoming more expensive for corporate entities.

"Even the prime lending rate is in excess of 20% - and that can be accessed only by AAA-rated companies like Hayleys and John Keells.

Small-timers have to pay 30%-plus."

Doing some crystal ball-gazing, de Silva predicts that interest rates will descend only when inflation declines to 10%.