IMF and the IMF!
View(s):
IMF officials at a recent media conference in Colombo.
Where to go, coconuts in the bag!
In the aftermath of the Great Depression in the 1930s and the World War II in the first half of the 1940s, the IMF was established (in 1944) by its 44 founding member countries; the purpose was to help improving the Balance of Payment (BOP) of the member countries, when they are faced with foreign exchange crises. Over the years the IMF has evolved in order to maintain its same objective in mind but to work for something else in its actions; that is “fiscal consolidation”, which is primarily about tax revenue and government expenditure.
Someone would wonder whether the fundamental cause of the current economic crisis is a foreign exchange problem – as we have discussed in this column in detail -, and how do we solve it by adjusting taxes and government spending. Or is it, because external finance should get the punch, when we hit the fiscal side? Or with all our efforts including the IMF assistance, are we heading in the wrong direction? We used to say with respect to a totally different question and answer in local colloquial language – “Where to go, coconuts in the bag”.
While fiscal consolidation is going to be at the heart of the IMF-supported reform programme in Sri Lanka too, the only thing that the IMF has mentioned about the foreign exchange problem is to restore “a market-determined and flexible exchange rate”. As Sri Lanka has chosen to continue with tightening import controls to stabilise its exchange rate, apparently, neither does this policy advice make much sense.
Too little.. too late?
Well, if things go well, the IMF is also going to grant us a loan of US$ 2.9 billion in six-month tranches within 48 months under its Extended Fund Facility (EFF) programme. When it was announced by the IMF through a media release at the end of its mission in the country, some of the people I met raised their eyebrows!
Many of them questioned: “Isn’t it too little to come after it has been too late?”
Of course, we understand the meaning of this concern: If we had approached the IMF at least two years ago, things wouldn’t have got so wrong, as it did. We wouldn’t have come to a serious crisis like the one we are faced with today. The more we delayed, the greater was the help needed to stay alive and breathing.
But now at the end of our journey to collapse where there is no stopping and turning, 2.9 billion dollars spread over 48-months, means on average just $725 million a year! We have been spending 5 – 6 billion dollars a year as our maturing foreign debt service payments and, about another 3 – 4 billion dollars just to pay for fuel. And after all, EFF tranches will also be released biannually after assessing the periodic progress of a reform programme that we have committed to.
Conditional EFF
Even the receipt of the EFF is subject to conditions: Sri Lanka must enter a debt-restructuring arrangement with its official and private lenders and show that the country’s debt is sustainable or bearable which is not the case now. Therefore, it is not only too little that is coming too late, but also too tough yet to receive it.
Nevertheless it’s worth having an approved programme with the IMF. In the first place, the EFF grant is not for paying the country’s foreign debt or import bills; it’s for the Central Bank to improve its foreign reserve position and to support the policy reform process.
The agreement with the IMF is important to implement a reform programme and to enhance the country’s international position. In the first place, having a committed reform programme is, anyway, a good thing, because we are not that good in implementing reform programmes after the 1990s.
Secondly, over the past 2 – 3 years, Sri Lanka’s international position had deteriorated and damaged with worsening macroeconomic imbalances, falling credit worthiness, continued dependence on bilateral lenders to import the basic needs and, finally the default of foreign debt. The IMF programme would help Sri Lanka to regain its lost status internationally.
IMF reforms
The reform programme that enables Sri Lanka to enter the IMF agreement includes basically the policy measures needed for “fiscal consolidation” aiming at reaching a manageable budget deficit. On the one hand it requires, tax reforms to raise government revenue which have already been proposed in the Interim Budget.
Cost-recovery pricing system has also been already implemented for fuel and electricity, by easing the burden of debt-ridden and loss-making state enterprises. In addition, market-based solutions and better regulatory mechanisms for a whole list of public enterprises are in the pipeline for implementation.
At the same time, the current economic crisis entails much adverse impact on the poor and the vulnerable segments of the society. Social spending may be raised, but it requires improvement in coverage and targeting, which had been distorted in the past with political interference and administrative inefficiencies.
The Central Bank’s monetary policy must be supportive to fiscal consolidation by phasing out money printing or financing the budget deficit. While the central objective of central banking – price stability through flexible inflation targeting – has been reminded, as its core requirement, the greater autonomy of the Central Bank has been emphasised.
A new area of concern that the IMF mission has noted in its reform programme is the focus on reducing corruption vulnerability through improving fiscal transparency and public finance management, introducing strong anti-corruption measures, and conducting an in-depth governance diagnostic.
With respect to the foreign exchange problem, the IMF has stated the need for rebuilding foreign reserves through restoring a market-determined and flexible exchange rate, supported by the comprehensive policy package.
Main issue
The main issue in question is, of course, rebuilding foreign reserves and restoring a market-determined and flexible exchange rate. The foreign exchange problem is in the heart of the current economic crisis too. The foreign exchange shortage has instigated import control in spite of resulting supply shortages, interventionist measures on the exchange rate in spite of its overvaluation, suspension of foreign debt payments in spite of all its damaging repercussions, and to continue with further borrowing from bilateral sources.
How does a reform programme that is primarily aimed at “fiscal consolidation” provide an answer to the foreign exchange problem? It’s true that increased budget deficits and, the Central Bank’s support to finance such deficits would worsen the BOP imbalance and exert pressure on the exchange rate. But the IMF reform programme on fiscal consolidation which would ease the fiscal and monetary policy pressure on BOP and exchange rate, would not solve the foreign exchange problem.
The answer comes with the implementation of a “comprehensive policy package” aimed at generating export earnings through investment promotion. I believe that it is our part to play in this whole process, because the IMF programme is not the answer to the foreign exchange crisis or foreign debt crisis.
Fiscal consolidation and supportive monetary policy would help in maintaining an export-oriented trade regime which is the only way to guarantee a recovery from the foreign exchange crisis and to maintain a sustainable growth path. If we are not prepared to play our part, it would be difficult for us to avoid going back to the IMF next time – the 18th time – too.
(The writer is a Professor of Economics at the University of Colombo and can be reached at sirimal@econ.cmb.ac.lk and follow on Twitter @SirimalAshoka).
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