So are we eating humble pie and going back to the IMF? Reminds us of the days when Ronnie de Mel was Finance Minister and it was said that Sri Lanka went around the international arena with the ‘begging bowl’.
The government last week announced it was negotiating an IMF standby facility of upto $1.9 billion to fund post-war development in the country and shore up Sri Lanka’s dwindling foreign exchange reserves.
It was The Sunday Times that was off the blocks on a possible return of the IMF, in an exclusive story headlined “Devaluation or IMF bailout: Economists sound warning as reserves plummet to lowest level, but CB confident” on January 18, 2009. The story quoted economists and exporters as urging the government to devalue the rupee or seek an IMF bailout package as foreign reserves had sunk to never-before levels. Central Bank Governor Ajith Nivard Cabraal was also quoted in the same story as saying that there was no need for such measures, saying “the situation is under control,” and that they were confident in raising enough cash from the Sri Lanka Diaspora through investments in bonds and treasury bills.
In a rebuttal of this story, several newspapers – the following day - quoted the governor and other CB officials as saying there was no need for an IMF package or devaluation as the reserves position was strong, and denied it was at the level of the early 1970s!
The following week, The Sunday Times in a subsequent story also reported that at a meeting (held a week before our January 19 story) which included senior Finance Ministry, Central Bank officials and State Minister for Finance Ranjith Siyambalapitiya, the possibility of an IMF standby facility was discussed. There was no denial of this story.
We are however not concerned about the denials, rejections or clarifications of news stories – rather of concern is the state of the economy and the about-turn in Central Bank policy to return to the IMF for support.
The crisis is growing. Sri Lanka will face serious questions on finance and the economy in a couple of months as the global crisis takes root. Last week Citi (Bank) Group was bailed out by the US government which now has an over 30 % stake in the group and may shed many subsidaries and overseas units to recover from the banking crisis that has hit many banks. Shares of other US banks also plunged in US markets.
Across Sri Lanka – even more, small businesses – jobs and pay cuts or perks are in the offing, and in most cases already implemented. In particular, many small businesses are struggling, an issue that hasn’t received the attention of the government which is on the other hand responding to requests for support from big companies and exporters, particularly garments. There is an urgent need for the government to also pay attention to small businesses, the core of the Sri Lankan economy, but lacking political clout unlike big business.
Garments, tea, rubber and most other exports have all been hit. Some companies in free trade zones have reduced the number of shifts and occasionally given paid leave to workers but for how long is anybody’s guess. The crisis has led to the Employers Federation asking government to consider a 5-day work-week instead of six days but with the same number of working hours per week in a bid to cut costs of power, etc.
According to many analysts, the worse is yet to come and would hit Sri Lanka in mid 2009.
In addition to the global crisis that is impacting on Sri Lanka in a slow but painful way, the country is facing other problems particularly in the financial sector which is causing ripples across the economy. The Central Bank’s stimulus package of Rs 4.2 billion for finance and leasing companies is essentially to instill confidence in a sector where the number of deposits has fallen drastically while the demand to withdraw deposits is rising by the day. The confidence factor is as a result of the collapse of Sakvithi (finance) coming in the wake of the financial crisis, and worsening after Golden Key collapsed. That triggered a chain reaction in Ceylinco’s finance and deposit-collecting companies (under different labels like security deposits, etc) with depositors rushing to check out their deposit status or seeking to withdraw their money.
On Tuesday the IMF team visiting Sri Lanka had a dinner meeting with President Mahinda Rajapaksa and a group of powerful business and industry professionals including Hayleys Group Chairman N.G. Wickremaratne, John Keells Chairman Susantha Ratnayake, MAS Holdings Chairman Mahesh Amalean and Brandix CEO Ashraf Omar. The visiting mission was told about the need to shore up foreign reserves, a further depreciation of the rupee and support from the IMF. The following day, the Central Bank announced that “at the request of the IMF” it was in discussions with the agency for a $1.9 billion standby facility.
The $1.9 billion facility will come at a price which the Rajapaksa administration has been avoiding since the IMF closed its Colombo office in January 2007. Although officially the position at the time was that the IMF didn’t have a programme and saw no need to have an office here, it was well known that the government frowned on agencies that imposed conditions for cheap loans or grants, virtually ‘easing’ the IMF out. The World Bank and the ADB have also had to face the ‘wrath’ of powerful government officials. Once a top official, no more with the administration, is reported to have said, “There is enough cheap credit in the world… we don’t need your ‘conditional’ money”.
The IMF in the past has raised concerns about the budget deficit, rising government expenditure and subsidies to farmers and other sectors – conditions that generally go with standby credit facilities. It is most likely that the same would apply this time too – whatever Central Bank officials may say about lesser conditions this time. |
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