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SRI LANKA: Economic Crisis Ramping Up, As War Winds Down
By Feizal Samath
COLOMBO, Apr 15 (IPS) - Government troops are closing in on the last remnants of Tamil Tiger resistance
in northern Sri Lanka as an upsurge of more that two years of fighting winds
down. But, the country’s economic woes aren’t over. More and more pressure it
being put on President Mahinda Rajapaksa’s cash-strapped administration.
Even a planned 1.9 billion dollar bailout package from the IMF may not ease
economic stresses. National growth is projected to fall to 2-3 percent from 6
percent in 2008 due to the world economic crisis, and many major
development projects may be suspended temporarily due also to high
military expenditures.
The Central Bank (CB) in its 2008 annual report released last week warned
that a string of hydro and coal power projects, new port development, and a
modern oil refinery may have to be postponed or slowed down this year due
to the financial crisis.
The CB said revenues are seen falling and suggested that it would be
"prudent" to postpone the implementation of new projects till the recovery of
global financial markets.
Adding to the government’s problems is a new campaign by rights groups
opposing IMF intervention without the ‘people’s consent.’ Sarath Fernando, a
veteran Sri Lankan campaigner of peasants and farmers’ rights, last week
launched a new campaign, saying, "We strongly insist that no loan
agreements should be signed without a wide and participatory process of
discussion on all relevant aspects not only of the loans but also of the
process of development."
Sri Lanka’s crisis is two-fold. First, there is sagging export income and the CB
is using the few dollars it has to intervene in local money markets to defend
the rupee from depreciating against the U.S. 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 has dried up with the
global financial meltdown.
The country’s gross official reserves by the end of 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.
Exports are down and garments - the biggest earner - are getting squeezed
out in other markets, while jobs are being shed across other 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.
Last week, the Labour Ministry agreed to allow temporary lay-offs for a
period of three months, and shorter working days in factories.
Fernando, coordinator for MONLAR, which represents people’s organisations
in fisheries and plantations, says they are alarmed that the government is
going back to IMF loans under possibly "destructive conditions."
"The country is facing serious problems of foreign reserves and of debt. The
government is so bankrupt that the foreign reserves currently available would
be sufficient only for one month's imports and the IMF bailout package will
materialize only if the government fulfils a set of conditions, one of which is
to devalue the rupee which would result in the cost of living going up further
by 50 percent," Fernando said.
Following the pledge of billions of dollars by the G20 of non-conditional aid
to needy countries, the IMF has indicated that it may dole out money in this
fashion to Sri Lanka without the conditions of the past. But, suspicion that
such aid would come with strings attached, continues.
Sri Lanka’s main opposition United National Party (UNP) admits that
‘conditional aid’ would be a good thing, as it would ensure the government
puts the money to good use instead of wasting it. UNP parliamentarian Kabir
Hashim, familiar with the country’s economic issues, told IPS that the
government has wasted millions on extravagant projects like a second
national airline - Mihin Air - which cost nine billion rupees (more than 90
million dollars) and has reported two years of losses.
"The government has been taking foreign commercial loans to pay off the
debt," Hashim said, adding that the IMF needs to ensure that the aid money
is channelled in the right direction.
In Sri Lanka the economic crisis began in 2007, soon after the government
began pumping billions of rupees into the war effort against the Liberation
Tigers of Tamil Eelam (LTTE). The aim has been to crush the rebels, oust
them from their eastern and northern strongholds, and clear the area for
development and government control.
More than two years later, Rajapaksa’s administration is now on the verge of
eliminating the military and conventional capabilities of the Tigers who are
boxed in, in a small area in the north - reportedly using the civilian
population as a shield against government incursions.
Hundreds of people, including combatants and civilians, have died and scores
wounded or maimed. The international community has urged the government
to act with restraint, while urging the Tigers to free the civilians. Military
analysts expect government troops to seize control of the last remaining
areas by the first week of May.
At the end of March, an IMF delegation returned home after an 11-day visit
aimed at reviewing the CB’s request for balance of payments support. A
flexible exchange rate policy - reduction of imports and increasing export
revenues to ensure a surplus (of dollars) - is what the IMF would ask the
government to do in the event the 1.9 billion dollar bailout package is
approved.
Economists said the team met CB and Finance Ministry officials and also had a
meeting with Opposition leader Ranil Wickremesinghe.
The visiting team is expected to submit a report to the IMF board by the end
of April, and if a board decision is announced, the first tranche of funds will
be received immediately. "There is no doubt the IMF will lend this money. It
has a moral duty to help countries in need," said Saman Kelegama, Executive
Director of Sri Lanka's Institute of Policy Studies. He said for the past three
years the IMF has been dormant and has built up a lot of reserves. "The
current crisis [across the world] gives it space to assert itself again."
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. In 2007 the IMF closed its Colombo office after the government
decided not to accept conditional aid.
(END/2009)
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