Uncertainty and confusion shroud the IMF facility

There is considerable uncertainty, confusion and misunderstanding regarding the granting of the IMF facility. The need for it however is becoming clearer. Revelations of debt repayment obligations this year makes it vital that we obtain the facility in order to maintain the country status of not defaulting on international debt repayments.

The trade deficit itself may decline this year as import expenditure is declining owing to lower international commodity prices, the depreciation of the currency and increased duties on some imports. The resulting deficit is being more than offset by private remittances, even though these are also decreasing in comparison with last year. Capital outflows owing to foreign debt repayments could cause a balance of payments crisis and pressure on the country’s foreign exchange reserves. It is for this reason that a lifeline is needed from the IMF.

The international developments in the past fortnight or so have not been helpful for the country’s economic future. The mounting international pressure to halt fighting and the international concern on the civilian casualties took on a serious twist when there were stories that the US and Britain in particular would influence the IMF to not grant the IMF standby arrangement. Whether there was any substance to his report or not is difficult to determine.

The old adage that there is no smoke without fire may be true in this instance as well. There were denials that the powerful members will use their leverage with the IMF to “punish” Sri Lanka by withholding the facility. These very denials may have been due to some initial moves in this direction. Interestingly the denial came from the security council of the UN and not from the IMF itself. The delay in granting the facility added credence to the story that was denied by the UN Security Council as well as some members of the European Union.

In any case the international concerns for the civilians trapped in the no fire zone and the mounting number of refugees could have been handled more diplomatically without altering an iota of the country’s policies. Maybe the language and manner of stating their concerns and the denial of a visa to the Norwegian Foreign Minister generated emotions that were not conducive to a sober discussion of the issue. A focus on how those concerned so much about the civilians could help the Sri Lankan government to reduce the casualties could have helped defuse the tensions and disagreements, without compromising on the government’s strategy to eliminate terrorism. Much finer diplomacy was needed.

The focus of the discussions should have been shifted to the massive problem of providing basic necessities for the internally displaced persons. A more constructive diplomatic encounter with foreign government emissaries would have been to the benefit of the economy. In the interests of balance, it must also be said that there have been a significant number of foreign representatives who have appreciated the difficult situation in the country and approved the manner in which the government has handled it.

While admiring the firm stance of the government and recognising the obvious double standards of western countries that have been responsible for millions of civilian deaths throughout history, including the atrocities in the Iraqi invasion, the fact is that we as a small country have to listen to the moralising of these powerful western countries owing to the weakness of our economy. This has become more so owing to the economic crisis that is revealed in the dwindling reserve position, balance of payments difficulties and heavy dependence on foreign assistance.

This is particularly so at the present point in time when we would have to depend on the generosity of foreign countries for the reconstruction effort that would require enormous amounts of assistance. Even before that, we require substantial resources to stabilise the crisis-ridden economy, especially the balance of payments and foreign exchange reserve position. The IMF facility of US1.9 billion or at least the first tranche is vital towards this stabilisation.

There is in any case some confusion about the delay in obtaining the IMF facility, the purpose for which it would be given and the conditions attached to the loan. It is contended that it is a procedural delay. This is perhaps a euphemism as the procedures the IMF wishes to follow include ensuring the proceeds of the loan are used as intended rather than for other purposes that it does not approve or is not intended for. The IMF wants to make sure that there is fiscal discipline that ensures government expenditure is brought into line with government expenditure. This is the most difficult condition for the government to fulfil in the context of the fiscal bind that the country has got into.

The IMF may recognise this and agree to a phased programme. On the other hand, the granting of the facility is likely to be in instalments or tranches rather than in one bullet. The subsequent tranches would most likely be based on evidence of steps taken to bring down the fiscal deficit and good economic management.

The temporary relief in the balance of payments through the IMF facility would have to be followed up with an improvement in the public finances to merit the remaining instalments of the bailout package to be given. This is where the government may fall into a trap. It may not take this condition seriously and may not implement the required reforms to comply with the conditions. That would be perilous in as far as the economy is concerned. There is also confusion with respect to the intended uses of the funds. There have been pronouncements that the IMF funds are for the reconstruction and development of the North and East. This is either a display of ignorance or purposeful deceit to give the impression that there is no balance of payments problem. The IMF does not give funds for long-term development projects. That is the function and responsibility of the World Bank. The IMF funds are unequivocally a bailout facility for the foreign exchange and balance of payments crisis. It is intended to stabilise the economy and ensure its external viability.

It is a rather foolish stance to pretend that there are no conditions attached to the granting of the loan. The currency has been depreciated, some import restrictions recently imposed have been lifted, import duties have been raised on several important import items and no doubt the need to bring down the fiscal deficit placed as a condition for further instalments of the loan to be released. Unlike in the past no conditions have been placed on other economic reforms such as the privatisation of industries as the IMF policy has changed.

In the interests of the country one can only hope that the IMF facility would be granted soon and that good economic governance would prevail.