Editorial

With Europe ablaze with yet another war, the ripple effect on the rest of the world will be felt if it is to continue for much longer in rising prices of gas, petrol, wheat, freight and the disruption of the supply chain of goods from that continent.

Sri Lanka is already grinding to a halt, literally. The fuel shortage has crippled public and private transportation. The war in Ukraine is going to hurt further as world market prices begin to soar amidst a chronic foreign exchange (forex) crisis.

And so, the inevitable seems to have happened. The Government has finally decided to go to the ‘last chance saloon’ – the International Monetary Fund (IMF) to bail itself – and the country out of the deep economic hole it has gotten into. Our front page story says the Finance Minister is expected to go for the spring sessions of the IMF – and the World Bank come April as the country’s available foreign exchange reserves plummet.

The vacillation, the indecisiveness, the reliance on one man’s stubbornness, seeing the mud through rose-tinted glasses was seemingly a problem. Independent economists believe Sri Lanka’s forex reserves available range from a precariously low USD 100 million which is basically two days of imports to a best-case scenario of a mere half month’s imports. Credible data is not available from a secretive Central Bank or the Treasury.

It is almost as if the Central Bank is in an ostrich-like posture of what it does not see not happening i.e. the amount of sovereign bond loans taken not just by the Government but by state banks and state-run institutions. The theatrics and the desparation we see with one state agency asking another, viz., the Petroleum Corporation asking the Electricity Board or SriLankan Airlines to buy its own fuel with its own dollars is such a tragicomedy.

The Central Bank and the Government have allowed a free-for-all in the forex market. It is manna from heaven for money laundering. They are encouraging an underground economy a.k.a. a ‘blackmarket’ driving honest business houses to the unofficial money changers for mere survival. It has begun to corrupt even some bank officials to accepting kickbacks. Bringing back controls with all its corruption is allowing the ‘big boys’ – the local oligarchs with political clout, to wallow in this murky environment and swallow the small and medium enterprises in the process.

Critics say IMF austerity measures implemented as conditions for a bailout – the ‘haircut’ as it’s called, almost always hurt the poorer segments disproportionately. It will also mean floating the local rupee to the dollar which will see a sudden jump in prices of essential goods, but then, that is unofficially the case anyway with the ‘black market’ in full force. Proponents of IMF intervention however, point to preferred creditor status in the global capital markets, multilateral development banks giving priority over other lenders for repayment when a borrower experiences financial stress and greater investor confidence when there is an IMF safety-net for a country. And that the long-term benefits outweigh the short-term sacrifices.

Clearly, the Government is risking a further backlash from an already seething public, angry over a cocktail of financial mismanagement and high-end corruption. Yet, the writing is on the wall. It has been for some time.

The choice is between a bailout or bankruptcy. As a temporary measure the Finance Minister was to make his second visit in three months with begging bowl in hand to India. And India is driving a hard bargain taking advantage of its neighbour’s plight despite the friendship rhetoric. The Finance Minister knows that.

Going to the IMF is not an alternative unless there are skilled negotiators well-versed in international finance to deal with the hard-nosed Fund officials in Washington. In 1977, when President J.R. Jayewardene introduced the liberalised economy there were those of the calibre of Raju Coomaraswamy, Ratna Cooke, Lal Jayawardene and others to supplement the quality Central Bank officials the President utilised to negotiate with the World Bank and the IMF. Who is there for this Government today?

Much later, President R. Premadasa understood IMF reforms were going to be painful in the short-term and launched the Janasaviya programme simultaneously. While the IMF focused on stabilising the economy, the massive garment export industry he launched provided jobs to rural women and created the initial base for diversifying exports. The garment industry was a life-saver at the time, and still is to this date.

And why economic growth was modest over the past years under IMF reforms was not only because of the local insurgencies at the time, but also because the IMF reforms were not fully implemented and local politicians opted for handouts given as election pledges instead.

Earlier this month, Argentina struck a massive USD 45 billion agreement with the IMF as it could not repay a USD 57bn debt. The IMF has been somewhat flexible pruning Argentina’s social programmes but asked that some subsidies be slashed. That is why skilled negotiators are needed should the Government decide to take the plunge with the IMF. An adjunct professor of International and Public Affairs of the Columbia University writing to this newspaper last week blamed the IMF for blundering down the wrong path with Argentina as it did in Greece (2010) for its egregious bailout criteria and in assessing failures that led those countries into greater debt problems.

Yet, the Argentine President conceded in an address to the nation this week that they had unpayable debts which left them with no present and no future, and no option but to go to the IMF. Yesterday, the IMF would have discussed Sri Lanka’s Debt Sustainability issues. It may also be time the Sri Lankan President too addressed the nation and gave his fellow citizens the true picture.