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SRI LANKA: Clinching a Crucial IMF Lifeline

Feizal Samath

COLOMBO, Jul 21 2009 (IPS) - After months of being at the receiving end of international criticism for human rights violations, Sri Lanka finally clinched a crucial agreement with the International Monetary Fund (IMF) on Tuesday for a standby credit facility of $2.5 billion, which will help bolster the country’s foreign exchange reserves depleted by the sharp impacts of the global economic downturn and an expensive war.

Dominique Strauss-Kahn, IMF’s managing director, in a statement that was cheered by Colombo’s stock markets on Tuesday, said that a staff mission had reached this agreement with the Sri Lankan authorities, and the program is expected to be considered by the Fund’s executive board on July 24. Its approval “would enable Sri Lanka to draw an amount of about US$313 million immediately.”

Though, technically, the final decision will only be known once the approval comes, Ajith Nivard Cabraal, the governor of the country’s central bank informed IPS that the board meeting is just a formality. “We have reached [the] agreement,” he said.

In February, Sri Lanka requested an IMF credit facility of $1.9 billion urgently needed to shore up sagging foreign reserves adversely hit by the combined force of lower revenues from export income and rapid withdrawals by foreigners who had invested in government bonds.

Last year, the central bank lost $600 million after foreigners pulled out their money in bonds as stock markets began tumbling across the world owing to the global economic crisis. On top of that, the financial markets regulator was also pumping in between $200 million to $400 million into local money markets to stave off a shortage, which weakened the reserves. By December 2008, gross official reserves stood at $1.7 billion compared to $3.5 billion in the previous year. This money was barely enough to sustain 1.5 months of imports.

Colombo stock markets, boosted by the news, witnessed share prices climb up sharply on Tuesday. Its turnover rose to one billion rupees from around 200-300 rupees million in recent days. Brokers said the news was expected to boost confidence in the market and once again entice foreign investors to return to Sri Lanka. The end of a nearly three decade long conflict in May is also expected to trigger a surge in investments.

While most IMF standby credit facilities are approved quickly, considering they are usually meant to offset contingencies, the Sri Lankan application was delayed amid allegations of mounting civilian deaths and other human rights allegations as the government entered the final phase of its war with Tamil Tiger rebels.

Western powers put pressure on the IMF to delay it as a response to the government’s failure to act against abuses. Dozens of trapped civilians were killed in the last stages of the battle in the north of the island.

On June 21, U.S. Secretary of State Hillary Clinton said that it “is not an appropriate time” to consider the IMF facility, considering the U.S. government was “trying to convince both sides,” the Sri Lankan government and the Tamil Tiger guerrillas, to stop fighting.

“We think that it is not an appropriate time to consider that (loan) until there is a resolution of the conflict,” Clinton said. Clinton’s comments drew a scathing response from Sri Lanka, who called the U.S. a “bully” for obstructing the loan.

On June 24, Sarath Amunugama, Sri Lanka’s deputy finance minister, said U.S.’s interference in Sri Lanka’s efforts to obtain an IMF loan was ‘deplorable’. Speaking at a Colombo seminar, Amunugama said: “The US has no business obstructing a project that is technically sound, on the basis of its misinformation. This is an unacceptable case of the bullies trying to run the World Bank and the IMF”.

On May 5, Reporters Without Borders (RWB), in a letter to the IMF, urged the IMF to obtain specific undertakings from the government to ensure press freedom as a trade off for granting this loan.

RWB said the Sri Lankan government’s crushing victory over the LTTE at a cost of thousands of civilian casualties, has been accompanied by a ruthless campaign against the press and critical voices.

“Of all the countries with a democratically elected government, Sri Lanka is one that shows least respect for media freedom”, it said.

However, Dr Muttukrishna Sarvananthan, a Sri Lankan economist, believes the issue had nothing to do with politics but economics and meeting fiscal targets.

“The real position of the proposed credit facility appears to be bogged down in technical details. The technical discussions between the lender and the borrower are ongoing, which are about safeguards against misuse of funds, policies to fix the longstanding fiscal problem of Sri Lanka, prudent management of the balance-of-payments, and the ability to repay,” he said

Negotiations with Turkey on a similar facility is taking longer than it did with Sri Lanka, he points out.

“My understanding of the real bottleneck is that, the Central Bank is yet to put forward a convincing fiscal, monetary, and balance-of-payments stability package to the IMF, taking into account the latest post-war economic imperatives,” he said.

But another economist, who is close to senior officials at the central bank, said international pressure was dampening Sri Lanka’s prospects for the credit facility.

“There was a lot of pressure from western powers to delay the loan until Colombo gets its act together on the political and human rights stage,” said the economist, who requested anonymity.

An experienced foreign diplomat, who also spoke off the record, believes that Indian influence with the West saved the day for Sri Lanka.

“India has a lot of clout internationally and has asked Sri Lanka to provide a reasonable solution to meet minority Tamil aspirations. In addition, after the global crisis and criticism over western-led IMF and World Bank policies (that contributed to the crisis), countries like India and China are being treated with more respect,” he said.

Last week, on the sidelines of the Non Aligned summit in Egypt, Indian Premier Dr Manmohan Singh met Sri Lankan President Mahinda Rajapaksa and praised his leadership in winning the war.

“[Singh told] Rajapaksa that he was most suited to enforce a political settlement,” the diplomat said. “It looks as though India and Sri Lanka reached some deal to provide Tamils some of their rights. In return, India [supported Sri Lanka] on theIMF loan issue,” he said.

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