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SRI LANKA: Economic Crisis Ramping Up, As War Winds Down

Feizal Samath

COLOMBO, Apr 15 2009 (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.

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