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    Govt.'s money for nothing theory

The Central Bank has kept the terms of IMF funding under wraps (inset) Nivard Cabraal

By R. Wijewardena

The closure of the IMF's Colombo office two years ago was hailed by the government as a victory. Sri Lanka the public was told had become a mature economy, and no longer needed to rely on the charity of Breton Woods institutions. Instead the country would be able to raise money on international capital markets.

Indeed that is precisely what the government did, issuing hundred of millions of dollars worth of bonds in 2007/2008.

But just two years later nothing is left of these multi million dollar loans, taken at exorbitant 8% interest rates, except decades worth of interest payments, and the country has now been compelled to return cap in hand, to the hand that has reliably fed its poor fiscal policy for decades.

It's a safe bet that the IMF's country office will shortly be reopening and two billion dollars are expected to pour into the states depleted coffers, shortly thereafter.

 There's no shame in this - far more developed countries, and much larger economies - Iceland, Turkey, Poland have had to crawl to the IMF - and these countries aren't simultaneously executing major wars or enormously ambitious development plans.

Government's bravado

In times of economic crisis governments must seek funds wherever they are likely to find them, however much of the state's recent bluster and bravado regarding the IMF loan has been unwarranted.

Bold statements insisting that the government will only accept money from the IMF on an unconditional basis ultimately only serve to obscure the reality of the situation.

The simple reality is that Sri Lanka is in desperate need of cash and as the international lender of last resort the IMF is the only institution that can supply the funds the country urgently needs to stave off bankruptcy and wholesale economic collapse.

Of course all the speeches in the world can't change the age old reality that you cannot get something for nothing and regardless of the bravado the idea that the IMF is prepared to hand over 1.9 billion with no strings attached is difficult to credit.

While the public, who will ultimately end up financing any loan eventually, has every right to know on what terms the loan is being offered and for what the money will be used, thus far very little information on the specifics of the IMF package has been released to the public.

Central Bank Governor Nivard Cabraal has mentioned that he is following a policy of 'radio silence' on the issue - but given the importance of the loan and its potential consequences in terms of IMF conditions and decades worth of repayments, silence in this instance is not an option.

Initially theCentral Bank Governor claimed the loan would provide funds for post war development projects in the north and east but it subsequently emerged that the loan is a 'stabilisation loan' - not specifically for any sort of development but rather an injection of liquidity intended to keep the economy from collapsing.

Further while the government claims that emergency loans offered by the IMF will, as a result of the ongoing economic crisis, be largely free of stringent conditions, Pakistan which negotiated a $7.6 billion stabilisation loan with the IMF last month was asked to drastically trim its budget deficit and reduce state expenditure.

IMF demands

Demands for a reduced budget deficit and lower state expenditure are almost agiven where IMF loans are concerned, and while the current financial crisis makes it plausible that the usual conditions that accompany IMF funding might be relaxed somewhat the idea that the IMF would lend money without any conditions what-so-ever is highly improbable.

According to the IMFs own Article Four Summary of the Sri Lankan economy, the organisation would like to see the government increase the tax base, decrease state spending and allow the rupee to float freely.

With the Central Bank recently announcing the necessity for the government to go slow on new infrastructure projects and proposed tax increases it appears the government is beginning to move in the direction outlined by the IMF.

A free floating rupee, an end to money printing, reduced state spending and increased taxation will almost inevitably be demanded by the IMF as part of a loan deal.

While the government argues that many countries have succeeded in securing IMF loans with minimum conditions as a result of the financial crisis - these countries are invariably large, internationally significant economies - Mexico or well managed economies whose difficulties are purely a result of the financial crisis - Costa Rica.

Sri Lanka falls into neither of these categories. Despite stirring statements on the subject of the nation not bowing to the IMF the fact that several loan and line of credit payments fall due this year with almost 1 billion dollars worth of debt repayments due in 2009 means that the country's bargaining power at present is virtually nil.

Further, recent developments regarding payments for the government's oil hedging debacle raise the prospect of even higher cash outflows with the government having to spend another $1 billion to stave off legal action from the major international banks that originally organised the hedging deal.

While the government may not out of fear of agitating unions and hardline nationalist elements within the ruling coalition, wish to disclose details of the conditions attached to the IMF loan the current uncertainty regarding the terms is itself fuelling unrest with unions and the opposition blaming the loan for everything from state hiring freezes to tax increases, before its terms have even been formalised.

Ultimately there is an urgent necessity for clarity on the issue and the government to speak with one voice and without hubris - the country's financial state at present is such that the very last thing the country can affordat present is arrogance.

When the Gov'nor said not to take him seriously

By Dr. Harsha de Silva

When I was finally given the chance to ask a question at a recent public lecture at the Central Bank of Sri Lanka (CBSL) with the Governor in the Chair I asked him what he had to say about his repeated statements on how Sri Lanka will not be affected by the global economic crisis due do the successful policies of the Mahinda Chinthana.  I pointed out that ironically the theme of the 2008 CBSL Annual Report was that we have been seriously impacted by the crisis and we will continue to suffer with the baseline growth projection falling to as low as 2.5 percent for 2009. 

His answer, to the surprise of the hundreds there, was that one should take such statements with a pinch of salt.  What?!  Until recently what governors of the CBSL said were followed with very keen interest and they moved markets.  What are we to make out of the incumbent's "pinch of salt" answer?  Not to take the CBSL seriously? Not to believe the CBSL? I don't know, but I am genuinely concerned.     

One thing the Governor's answer brings to light is a trail of similar statements in the recent past.  Have they all been cruel jokes?  A few come to mind immediately.  The purpose of the USD 500 million sovereign bond issue (for 'development' of various infrastructure projects), the actual foreign reserve position of the CBSL (adding ACU credits and creating confusion) and the success of the USD 500 million 'Time Is Now' diaspora bond (book building happening just fine while market talk is less than USD 2 million has been raised after two and a half months).

Big story

The big story now of course is how the IMF is "offering" us money "without any conditions" because they are so impressed with our economic management record.  This at a time when "we knew better" and sent them packing! 

Anyway, at the same public lecture, the Governor, in my view, unfairly dismissed CBSL's former Assistant Governor Anila Bandaranaike who asked why the CBSL had mentioned that the proceeds of the proposed USD 1.9 billion-loan were for reconstruction work in the north and the east when it was really for balance of payment support. The Governor repeatedly mentioned no such statement was ever made and ridiculed the reputed economist. 

However, this is how the state owned news agency Lankapuvath reported the CBSL statement on March 5, 2009; "Sri Lanka Central Bank yesterday announced that the Sri Lankan government is seeking a US$ 1.9 billion loan from the International Monetary Fund (IMF) to fund the resettlement, rehabilitation and reconstruction work in the Northern Province, and to continue the rapid development of the Eastern Province." (Search 

Furthermore, BBC on March 7 reported "In an (email) interview with the BBC, the Sri Lankan Central Bank Governor said the money would also be used for post-war reconstruction of Northern and Eastern Provinces." (See 

There are many such incidents of "oh, it was a joke, did you get fooled?" or "we never said anything like that," but there is no point in going down that road.  What we need is for our almighty officials to be a little bit more modest and have the decency to be honest with the people of this country.

People deserve to know

We deserve to know the truth because it is our country after all.  Why are we taking such a big IMF loan?  What is it for?  What kind of prior actions have we to meet to get the money?  Are we going to change our policy on exchange rate management?  Why are interest rates so high when inflation has fallen so low?  Why are we raising taxes when we really need to cut taxes to get our economy moving again? 

Why can't we get rid of Mihin Lanka?  Do we really need to spend so much money on vehicles for politicians?  Are the conditions for the so called export rebate too high for genuine exporters to meet?  Why should more than 50 cents from every tax rupee be spent on public sector salaries and pensions?  Would it not have been better to negotiate with the banks on the hedging issue than accusing them of corrupt deals (note always two parties to a deal) and getting our credit rating downgraded? 

It is unfortunate that those who are asking such questions are subjected to various types of harassment on the premise they are attempting to scuttle the progress of this nation.  A case in point is the recent outburst by some very high officials that some people, purportedly including myself, were attempting to "get IMF to enforce harsh conditions on Sri Lanka." 

What kind of nonsensical argument is that?  I wish I was that influential!  Would it not be better to openly discuss the issues among the different stakeholders including opposition parties in parliament and agree on a common course of action to deal with the current challenges we are facing? 

Is it that difficult to sit down and discuss economics without losing one's temper and calling names?  I grant no one is perfect and economics is not an exact science.  Sometimes we are right and at other times wrong.  That is the nature of the subject.  At times even the same economist may have two views on one issue.  At the lecture I recalled the story of how President Truman once asked for a "one handed economist" so he won't have an "on the other hand" view to his position. 

I only took the case of the recent exchange with the Governor CBSL as an illustration.  What all of us need to realise is that the only way to reach consensus is through discussion and debate.  I feel the time has come for the government to initiate a genuine exchange of ideas among all concerned if we as a country need to move forward.  The current approach of taking the people for a bunch of idiots will only bring disastrous consequences.



    More Economy....

  When the Gov'nor said
     not to take him seriously




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