Govt.'s money for nothing theory
The Central Bank has kept the terms of IMF funding
under wraps (inset) Nivard Cabraal
By R. Wijewardena
closure of the IMF's
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
that is precisely what the government did, issuing
hundred of millions of dollars worth of bonds in
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.
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.
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.
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
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.
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.
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
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
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.
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.
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.
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.
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
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
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.
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
By Dr. Harsha de Silva
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.
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
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
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
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
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
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?
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?
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
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
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.
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.