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FINANCE: IMF Quits Sri Lanka – May Return

Feizal Samath

COLOMBO, Feb 14 2007 (IPS) - The International Monetary Fund (IMF) shut its Colombo office this month saying it no longer had a Sri Lankan programme, but economists and civil activists say the Fund is still expected to keep a watch over this war-battered nation.

&#39&#39I doubt the IMF will stay away for long. Look … the government disbursed just 20 percent of foreign funds each year (from all donors) but still the IMF chose to remain (despite all the criticism),&#39&#39 noted Sarath Fernando, a well-known civil society activist.

Muttukrishna Sarvananthan, an economist and principal researcher at the Point Pedro Institute of Development, says the IMF will oversee Sri Lanka from its New Delhi office. "We still owe them money."

Ever since opening an office in the late 1970s, soon after Sri Lanka embraced economic reforms and a free market – much ahead of India and the rest of South Asia – the IMF has had a rocky ride with opposition from left-wing groups and farmers. Sri Lanka became a member of the Fund in 1950.

The Fund has been critical of Colombo’s high budget deficits that have reached nine percent of gross domestic product (GDP) thanks to excessive public spending and a bloated public sector. It wants leaner and meaner adminstrations, advocates raising tax to collect revenue for state spending and across-the-board subsidy cuts. This has not found favour with large sections of the country’s population, many of whom are dependent on subsidised farming.

In recent months, however, the government has assailed the IMF saying its stringent conditions for lending were unacceptable.

A few weeks after the IMF in a Christmas eve announcement said it was closing the Colombo office, Sarath Amunugama, an influential minister who earlier served as finance minister, told reporters that Sri Lanka was not running after the World Bank or the IMF anymore to obtain loans. "There are several countries willing to help Sri Lanka," he was quoted as saying.

Amunugama, who is minister for enterprise development and investment promotion, cited the 700 million US dollars worth of support offered by Iran as aid with no stringent conditions, soon after the after the Development Forum in January hosted by the government for Sri Lanka’s donors.

The outspoken minister said Japan, China, India, Hungary and several East European countries were ready to provide aid to Sri Lanka and noted that it "is an utter myth that Sri Lanka is under obligation to the World Bank or the IMF to get aid.’’

‘’Many countries like Thailand have stopped borrowing from IMF and also the IMF has less money to lend. The Fund’s conditions, over and over again, are not being followed and hasn’t got civil society acceptance," notes Fernando, one of the main coordinators of the Movement for National Land and Agricultural Reform (MONLAR).

Uruguay, Brazil, Argentina and Indonesia are among the countries that have shut down their accounts with the Fund in recent months, prompting concern among rich nations that dominate the board of the IMF that they were rapidly losing credibility as well as the ability to influence economic policy with important clients.

The United National Party (UNP) government of 2002 lost parliamentary polls in April 2004 after its World Bank/IMF-inspired reforms did not ‘trickle down" to the poor fast enough. The government was accused of spending all its resources and too much time on a peace process and ceasefire with Tamil militants, determined to carve out a separate state in the north and east of the island.

"Failing to understand the aspirations and the needs of the poor was politically suicidal. The UNP’s ‘Regaining Sri Lanka’ plan (to build a new economic order in the country using the peace process as a base) was very unpopular because it mostly benefited businessmen," Fernando said.

But economist Sarvananthan argues that the trickle down effect does not happen overnight. "It takes a long time," he said, adding that the IMF’s presence in Sri Lanka was added comfort to donors and foreign investors. ‘’It provided some security to donors, while investors knew the IMF provided the important checks and balances in the country.’’

In its closure announcement, the IMF said the decision reflected the evolving nature of the IMF&#39s relationship with Sri Lanka, with the country no longer having a programme with the IMF.

The Fund&#39s senior resident representative for Sri Lanka, Luis Valdivieso, said the decision was also was taken in the context of the overall declining budget available to the IMF to maintain an office in Colombo. The Washington-based IMF will continue to maintain a close relationship with Sri Lanka, with staff visiting regularly to exchange views with the authorities, he said.

Two days before the surprising announcement, the Fund, in its last report issued in Colombo, warned Sri Lanka to settle its long-standing ethnic conflict that has claimed over 65,000 lives since violence intensified in 1983.

"Sri Lanka&#39s near- and medium-term economic prospects depend critically on progress on the peace front and on implementing essential reforms," the IMF said in its annual review known as the Article IV consultations.

Since 2003, the IMF has lent to Sri Lanka more than 400 million dollars in SDRs (Special Drawing Rights) for poverty reduction programmes and balance of payment support, but Colombo has drawn less than 60 million, clearly exposing the country’s weak foreign aid disbursement mechanism.

Nimal Sanderatne, Sri Lanka’s most eminent economist and a retired central bank official, believes there was no IMF programme because the government was unable to meet the ‘conditions’. "The IMF move is a negative signal to investors. A lot of their decisions were based on IMF-World Bank strategies," he said, adding that the Fund’s call for cutting the budget deficit was reasonable as the state was spending heavily on unproductive segments like defence.

MONLAR’s Fernando, a vocal critic of the IMF and World Bank, says the Fund’s prescriptions of faster growth has not reduced poverty. "We are not saying Sri Lanka shouldn’t use these loan facilities but there should be out of the box thinking to suggest different approaches – instead of the same old solutions – and also convince the IMF to accept the views of the people."

"For decades these prescriptions haven’t worked. It has only led to the poor subsidising the rich through grand infrastructure building of new airports and ports. The Washington-based agencies say they have consulted the people but the people who raised the questions have been ignored," Fernando argued.

D.E.W Gunasekera, a Communist Party leader and a minister in the government, reckons the IMF no longer has a role to play in a world order that is changing. "Some 45 percent of the world’s GDP is controlled by Asia and the U.S. doesn’t have a say anymore. These are the realities for the IMF."