Will we get it or will we not? That is the question still in the minds of Sri Lankans about the loan facility of US $ 1.9 billion that has been in the pipeline for quite some time now. An anonymous Central Bank of Sri Lanka official is said to have stated the loan is now finalised and it would be announced at the end of the month. The Central Banker is supposed to have said the amount would be US$ 2.1 billion somewhat higher than the amount originally expected.
The nature of the statement is suggestive of it being an informed one. Then again the Governor of the Central Bank of Sri Lanka has been quoted as saying the bailout facility is not vital and that Sri Lanka will not go begging for loans. This sends out different signals.
On the other hand, an IMF spokesperson Caroline Atkinson has said the IMF loan for Sri Lanka is still not ready for approval by its Executive Board and that whenever there is final agreement, a programme would go to the Executive Board. Whether this is a procedural delay or due to the government and Central Bank being unable to meet some conditions is unknown.
The IMF spokesperson has also said the loan had been delayed as it awaited approval from the US Treasury, which also consults other agencies, including the State Department, which is yet to approve the loan. This aspect of the procedure has a political dimension that we feared after the statements by Hillary Clinton, the US Secretary of State that Sri Lanka should not be given the IMF loan.
It is well known that the US has the biggest share of votes in the IMF and wields considerable influence among other Western countries as well. The current diplomatic standing between Sri Lanka and Western countries is not propitious and it is likely the loan is used as a political clout. The procedure also requires the US Executive Director to vote on the loan after receiving a report from the international monetary affairs office of the Treasury.
It was most unusual for the US Secretary of State to comment on Stand-by arrangements and other financial support provided by the IMF. Perhaps this has never happened before. One wonders why this happened.
The usual procedure is that the Secretary of the Treasury has a representative in the IMF board who represents the US Government. In the past IMF loans have been made to countries like Iran, when the US representative only refrained from voting. This was to indicate to the World that the US does not influence individual IMF board decisions. Instead what they do is to influence IMF funding.
At present a bill for $ 108 billion is held up in the Congress because the far left wing of the Democratic Party tagged the bill to Iraq and Afghanistan funding.
That is perhaps the reason for the hiatus. The IMF management may be worried that if they go ahead with the Sri Lanka Stand-by facility the US government will not support their funding of the $ 108 billion that the administration has promised to help with in the world financial crisis. The issue appears to be as clear as crystal. May be the truth would emerge at the end of the day or may be not.
The Central Bank Governor’s statement that the funds are not necessary is indiscreet and impudent. Even though the balance of payments position may seem to have improved from the time when the loan was applied for, there are reasons why the loan is needed. Although the country’s reserves have improved and there is an expectation of foreign funds for rehabilitation and rebuilding that would initially strengthen the reserves, and the trade and balance of payments situation appears to have improved, these are not good enough reasons for complacency.
There are reasons why the country should go in for the IMF loan. First, it is imprudent to think we are out of the woods about financing our current and potential deficit in the balance of payments. The increasing oil prices that recently reached US$ 71 per barrel, the declining trend in private remittances and the poor performance of exports are reasons for caution, even though there are substantial foreign funds as assistance for reconstruction.
Second, borrowing from others if resorted to may be inadequate and on terms that are not favourable compared to the IMF Stand-by credit. The most important raison d'être in the Sri Lankan context of fiscal management is that borrowing from the IMF has a disciplining effect on the Government as the IMF will monitor the programme and will help the Government to take unpopular measures of reform. It is also good to have the IMF funds to help out when we have massive expenses for reconstruction and rehabilitation.
There is another factor that Western countries may consider now that the war is over and the issues they raised are settling.
The withholding of the IMF facility may do more harm to their influence and credentials in Sri Lanka. Already China, India and Russia have scored over the US and EU countries and the developing scenario is counter to the known foreign affairs expectation of having Sri Lanka as an ally in the region.
As we suggested earlier in these columns nothing succeeds more than success and there is a prospect that the US may now want the loan to be given. There are foreign policy reasons for the US to relent the earlier position of “punishing” Sri Lanka. Not only is that episode over, but the US appears to have lost much prestige and influence with Sri Lanka in the last few months with China, India, Japan and Russia among others stepping in to assist the country in substantial ways.
China’s sphere of influence in Sri Lanka has expanded to the dismay of India that is trying to gain more influence here. The foreign policy dilemma has been aptly captured by the former Indian diplomat M K Bhadrakumar in his article Sri Lanka Wards off Bullying of Western Powers, in the Asia Times of May 27 this year. He has said US pressure won't work though it can block Sri Lanka's application for a US$1.9 billion emergency loan from the International Monetary Fund (IMF). The situation has changed. The urgency of the loan is less and the US may stand to lose more than it gains by blocking the loan.
There are three significant lessons that emerge from this experience. International organisations are the tools of powerful powers who wield voting strengths and influence in voting in them. This was a known and accepted fact with respect to such organisations as UNESCO, the UN and other international institutions. Perhaps we were naïve in thinking the IMF was an organisation that made its decisions on the basis of economic and financial criteria.
The strong criticisms of the Breton Woods institutions as tools of western capitalist countries have been vindicated by this episode. A serious implication of this experience is whether the international financial order should be governed by political considerations that may defeat the original objectives of these institutions. It may be opportune for a scrutiny of these institutions and a reform of their structure reflecting the changed economic and financial status of countries such as China, India and Japan.
Our conjecture is that despite all the controversy and confusion the loan would be given. Then we could say “all’s well that ends well”. |
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