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ECONOMY-SRI LANKA: Return of the IMF

Feizal Samath

COLOMBO, Mar 10 2009 (IPS) - Sri Lanka is going on bended knee to the International Monetary Fund (IMF) – an institution it chased away two years ago – for a bailout package worth 1.9 billion US dollars, as authorities scrape the barrel for foreign exchange.

The value of the country’s imports are now much more than its exports and foreign exchange reserves, which have normally averaged over three months worth of imports.

The crisis is two-fold: sagging export income and the Central Bank using the few dollars it has to intervene in local money markets to defend the rupee from depreciating against the US dollar.

On the other hand, the government’s access to cheap commercial borrowings from foreign sources to fund the costly war against separatist Tamil rebels and other high spending state sectors has dried up with the global financial meltdown.

Last Wednesday, the government bit the bullet and announced it was in negotiations with the IMF for a 1.9 billion dollar standby arrangement.

Central Bank Governor Ajith Nivard Cabraal – who has been criticised by economists and opposition legislators for misleading the country on the state of its finances – was quoted as saying: ‘’The offer was made for a facility without conditions. We didn’t think we needed it but then this happened to be a good opportunity.’’


While the country’s gross official reserves by end December 2008 stood at 1.7 billion dollars, sufficient just for 1.5 months of imports, compared to more than 3.5 billion dollars in December 2007, the irony of the wakeup call is that the government is seeking help from an agency it had virtually thrown out from the country in January 2007.

Senior economist Sirimal Abeyratne from the University of Colombo told IPS that the financial crisis is so acute that Sri Lanka had few choices. ‘’Otherwise, why ask for money if we have money, particularly from an institution [IMF] that the government didn’t want,’’ he said.

Dushni Weerakoon, senior economist at the Institute of Policy Studies, said Sri Lanka’s main problem has been the ‘’outflow of foreign exchange last year following the global economic crisis and using whatever resources we have to defend the Sri Lanka rupee in local money markets’’.

She told IPS that in addition to the outflow of 600 million dollars after foreigners withdrew monies in Central Bank bonds in the second half of 2008, the Central Bank has been pumping some 200 million dollars a month (in the last three months of the year) in an unsustainable exchange rate policy to prop up the rupee.

The move to return to the IMF for emergency cash comes more than two years after the IMF closed its Colombo office, saying it had no programme here.

However, the opposition and economists at that time said the government, under pressure from hard line partners like the JVP (People’s Liberation Front) and the JHU, formed mainly by Buddhist monks, who frowned on western-led multilateral agencies like the IMF or World Bank and their tough, conditional lending, had openly expressed distaste for loans that came with strings attached.

The last IMF facility was a 567-million-dollar loan given in April 2003 to support the government’s 2003-2006 economic programme. The first tranche of 81 million dollars was immediately received but the loan was suspended in November 2003 due to political problems and in April 2006 it expired. The IMF had set up its Colombo office in 1979.

IMF, generally seen as a lender of last resort, comes with conditions like reduced budget deficit, cutting government spending, tighter monetary policy and a flexible exchange rate policy where the rupee is freely floated against other major foreign currencies.

Currently, the rupee rate is fixed by the Central Bank and adjusted in accordance with import requirements.

Exporters have complained over the years that the rupee has been artificially held high against the dollar, resulting in lower export incomes. The rupee is pegged high to keep import costs, particularly of food and fuel, down.

Government economists and the Central Bank have repeatedly denied the existence of a crisis. Exports are down and garments, the biggest earner, are getting squeezed out in other markets, while jobs are being shed across the employment sectors.

The Employers Federation, an umbrella group of employers, has asked the government to reduce the number of working days per week to five from five-and-a-half days in a bid to cut costs.

Weerakoon said the government’s problems have been compounded by the shortage of commercial borrowing avenues in the international markets after the financial meltdown.

In a Mar. 5 report on the IMF website, an IMF study, based on an online survey of how low-income countries have been hit by the global economic crisis, says that at least 25 billion dollars in urgent concessional financing will be needed, this year, to help countries affected by the deepening global economic crisis and prevent millions from falling back into poverty.

Hugh Bredenkamp, deputy director of the IMF’s strategy, policy and review department and one of the study’s authors, said that Ghana and Sri Lanka are good examples of the relatively few low-income countries that, prior to the crisis, had begun to get access to international financial markets to help finance their budgets.

Bredenkamp said both countries were hit as the markets essentially shut down. Ghana had plans to issue a big euro bond last autumn, but had to put that on hold, and Sri Lanka has seen the spreads on its international borrowing rise to essentially prohibitive levels.

At the same time, these countries have seen foreign investors exiting from their domestic bond markets. So those two avenues for financing budgets are now drying up, Bredenkamp said in the report.

Other economists said much of the country’s spending, particularly on the military, came from domestic borrowings and when that dried up, it came from foreign borrowings from commercial sources, and China and Iran.

Sri Lanka has been relying on support in political and economic ways from China against the once-favoured West which has been repeatedly critical of human rights violations, muzzling of the media and harassment of journalists.

Early last year, before the global crisis, the government was so gung-ho about the access to cheap credit from commercial sources that one powerful finance ministry official once told a senior World Bank staffer: ‘’We don’t need your conditional money. We have access to cheap credit without conditions.’’”

With foreign reserves fast dwindling, the Central Bank, whose governor is a political appointee and former advisor to President Mahinda Rajapaksa, in February announced two measures to shore up reserves: raising 500 million dollars from Sri Lanka’s diaspora and currency swaps with other Central Banks in the region.

None has worked as expected. Weerakoon says the swaps and diaspora funds do not work in the short term, a view shared by Cabraal. ‘’We have exhausted access to domestic borrowing and international markets [or it has dried up]. In currency swaps, there is an agreement with the Malaysian Central Bank while the authorities are also discussing a similar arrangement with India,’’ Weerakoon said.

Cabraal said some accounts had been opened by Sri Lankan expatriates in the bond market and the process was slow but that this was not unexpected.

Abeyratne said Sri Lanka was in a debt trap where one had to borrow to pay off debts. ‘’We are down to our lowest levels. Diaspora funds have not come as expected. Last year the government paid close to half a million dollars in debt payments and this year it will be higher. So we are borrowing to pay off our debt – which is where part of the 19 billion dollar IMF facility will go.’’

Weerakoon said the debt payments will increase this year once some Central Bank bonds expire and payments are made. ’’Also there is the Iranian oil credit-line payment that has to be made,’’ she said. ‘’There is quite a list of payments.’’ ”

 
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