Columns

The long-awaited assistance from the International Monetary Fund (IMF), often described as a “bailout”, was announced last Monday in Washington D.C.

The announcement that the International Monetary Fund (IMF) had approved an Extended Fund Facility (EFF) of US$ 3 billion and that the first tranche of US$ 333 million would be released soon ended a long period of waiting. It has boosted the prospects of an economic recovery.

IMF statement

The IMF statement said: “The Executive Board of the International Monetary Fund (IMF) approved today a 48-month extended arrangement under the Extended Fund Facility (EFF) with an amount of SDR 2.286 billion (395 percent of quota or about US$3 billion).”

Prudent fiscal and monetary management, vital economic reforms including the privatisations of loss-making state-owned enterprises (SOEs) that are a burden to the public finances, proper utilisation of funds, elimination of corruption and economic policy reforms which are vital prerequisites for economic recovery are conditions in the agreement. In short, efficient, uncorrupt and pragmatic management of the economy are conditions of the IMF facility.

Furthermore, political and social conditions that are conducive to the implementation of reforms are vital to make the economy function at its potential.

A root cause of the country’s economic debacle has been corruption and inefficient administration. An important provision of the IMF agreement is the elimination of corruption.

IMF finances

Although the EFF of US$ 3 billion over the next four years would not by itself boost the external finances much, it would enhance international confidence in the country and enable the adoption of more flexible exchange rate policies that could boost exports, and increase capital inflows and inward remittances.

In fact, the IMF arrangement is expected to unlock US$ 7 billion of multilateral and bilateral assistance. Multilateral agencies such as the World Bank and Asian Development Bank (ADB) are likely to finance development projects. They are likely to begin development projects. Some of the halted multilateral and bilateral projects, too, are likely to resume. One such project is the Japanese-funded Light Railway Transit Project (LRT). These, too, would improve the external finances.

Setbacks

Nevertheless, there are risks, threats, and uncertainties that must be avoided. Politically motivated strikes and protests could derail such projects and privatisation of SOEs, as in the past.

Improvement

In addition to the IMF finances, there has been an improvement in the country’s external finances in the first two months of this year. A balance of payments surplus of about US$ 2.5 billion is expected owing to higher remittances of about US$ 5 billion and US$ 3 to 4 billion earnings from tourism. These two sources of external finances could bring in about US$ 7 to 8 billion this year and generate a balance of payments surplus of about 2.5 billion.

Political and social unrest

However, this expectation could be undermined by social unrest. The country should be safe for tourists for tourism to regain its past level of earnings.

If the current wave of tourism is boosted, tourist earnings could increase. On the other hand, unrest in the country could be a setback to this expectation.

Policies

The success of the IMF programme depends on whether the country would follow pragmatic economic policies, adopt prudent economic management, reduce, if not eliminate, corruption, pursue economic reforms, and ensure proper utilisation of funds. These are difficult in the country’s political culture and social milieu.

Conditions

Political and social conditions conducive to the adoption of reforms are vital to make the economy function at its potential. Protests, strikes and political and social unrest could hamper the needed reforms for good economic management, fiscal consolidation and monetary stabilisation, which are prerequisites for economic recovery and growth.

Turning point?

Could we make this IMF arrangement a turning point in the country’s economic development? The road to economic growth and development is long and arduous. Tough decisions and hard times are ahead.

Consensus

A strong political commitment and a broad political consensus are needed to effectively implement the required economic reforms.

India

In 1991, when India adopted an IMF Structural Adjustment Programme, the government and the main opposition party arrived at a consensus to support the reform programme. Can we expect such a consensus?

Questions

Do we have a strong resolve, a national consensus and a commitment to implement a recovery programme? Will we use this opportunity to put the economy on the road to economic development? Are we at a tipping point towards economic recovery and economic growth?

Lost opportunity?

Will the country make this a tipping point in the nation’s economic history to revive the economy or fritter away the opportunity for economic growth due to the political motives of leaders?

Threats

Will current political upheavals weaken external finances? The prospects of an improvement in the external finances this year could be threatened by the ongoing strikes, political protests, social unrest and disruption of production. These pose serious concerns, instability and uncertainty in external finances.

Political unrest

The current spate of strikes, political protests, social unrest and discontent are not conducive to the functioning of the economy and an upsurge in economic activity. Political stability and law and order are vital to achieving economic growth.

Conclusion

The external reserves could improve if the flow of remittances and tourist earnings reach around US$ 7 billion. While remittances are likely to increase, earnings from tourism are susceptible to the security conditions in the country. If the country is considered safe for tourists and there are no disruptions to travel, earnings from tourism alone could reach US$ 3 to 4 billion to boost the external finances.

The all-important issue is whether political upheavals will affect the upsurge in tourism and weaken external finances. The prospects of an improvement in the external finances this year could be threatened by the ongoing strikes, political protests, social unrest and disruption of production. On the other hand, the release of the first tranche of the IMF’s EFF would enable more market-friendly policies that could boost the country’s external finances.

Are we on the road to economic recovery?