By Mandana Ismail Abeywickrema

The people will be made to feel the pinch of the government’s “great victory” in receiving a US$ 2.6 billion stand by facility from the International Monetary Fund (IMF) as it entails difficult economic reform measures for the country.

In fact, some of these reform measures have resulted in a complete turn around in government economic policies.

The government has agreed to reduce its budget deficit by increasing its tax revenue, prioritise its external debt repayment, limit borrowings and even slash its expenditure on transfers, measures that would undoubtedly place further economic burdens on the masses.

The restrictions on foreign borrowings would also pose a problem for the government in finding funds for its development programme.

In contravention of Mahinda Chinthana

The acceptance of the stand by facility along with the economic reform measures is also in complete contravention of the government’s economic policy framework enumerated in the Mahinda Chinthana policies.

Economist Dr. Harsha de Silva says, the key undertaking by the government of reducing the budget deficit to 7% this year is in contravention of the economic policy of the Mahinda Chinthana.

Page 40 of the Mahinda Chinthana policy framework (English copy) states under Macro Economic Management, “The mere reduction of public expenditure and the resulting reduction of the budget deficit per se is not a characteristic of prudent public finance management.”

Central Bank Governor Ajith Nivard Cabraal told the media last week, “The IMF has accepted the Mahinda Chinthana policy for the country’s economic development.”

Addressing the root causes

The government has now gone against the foundation of its economic policies, De Silva said. “The government that discarded the Fiscal Management Act of 2003, has now undertaken to abide by it in order to reduce the budget deficit,” he said.

IMF’s Mission Chief to Sri Lanka, Brain Aitken told journalists in a teleconference that the government has shown interest in addressing the root causes that created the vulnerability of the economy.

“The government’s programme is quite ambitious in addressing the problems, and the root causes that created the vulnerabilities for the economy,” he said.

De Silva explained that the IMF monitored stand-by facility for the country comes with economic reforms.

Difficult economic reforms

Granting the stand by facility, IMF’s Deputy Managing Director and Acting Chairman, Takatoshi Kato said the Sri Lankan government would have to take on “difficult economic reform measures.”

A week after receiving the facility, the President appointed a Tax Commission to look into the tax system in the country and to look at reasons for the recent decline in revenue.

The appointing of this Commission was an undertaking given by Sri Lanka to the IMF.  The conditions attached to the IMF facility are aimed at reducing the budget deficit, shrinking external borrowings, offering more bank credit to the private sector and limiting money printing.

De Silva observed that IMF is forcing the government to break the cycle of external borrowings at high rates to meet debt payments.

Based on economic reforms

“Sri Lanka’s programme is based on economic reforms and the opening up of sectors for private investment,” he said.

He explained that the IMF has called for the banking system to give more credit to the private sector as opposed to the government. As at May 2009, the net credit given by banks to the state has increased by 86%, corporations by 77%, while the private sector has seen a decline of 4%. The country has also pledged not to borrow more than US$ 1.7 billion during the course of the programme.

According to De Silva, it would be difficult for the government given its US$ 2 billion borrowings for the last 20 months till June 2009.

“The government has borrowed US$ 500 million between October and December 2007, US$ 1,204 million in 2008 and US$ 310 million by June 2009. These amounts include the HSBC loan, other syndicated loans, Sri Lanka Development Bonds and US$ 645 million sourced through the Bank of Ceylon,” he said.

Slash expenditure

Interestingly, the amounts due from the country between now and 2013, which is US$ 1.9 billion and the US$ 800 million hedging loss amount to US$ 2.7 billion, De Silva pointed out.

“The IMF facility brings in US$ 2.6 billion to the country’s reserves,” he said.

He also observed that regardless of the comments made by the government that subsidies would not be slashed in any way, the government has in fact agreed to slash expenditure on transfers if the need arises.

In Clause 4 in the Letter of Intent (LoI) under Fiscal Policy, the government states, “In the event of a revenue shortfall or expenditure overruns relative to the amounts envisaged for 2009 under the programme, we will take prompt action to contain other current expenditure — including on goods and services and transfers — or raise further revenue to safeguard the deficit target.”

The government has currently estimated an amount of Rs. 194 billion for transfers this year. Of the amount Rs. 150 billion is allocated for households, which include Samurdhi, pensions, fertiliser subsidies, etc.

Meanwhile, the government has also undertaken to slash Treasury subsidies to the CPC and CEB. “Specifically, the aim is to ensure that the CEB and CPC break even by end 2011,” the LoI states.

Rehabilitation of the war affected

The IMF expects the decline in military expenditure, increase in tax revenue and containing other additional expenditure to provide the country with necessary funding to carry out its development programme, especially the rehabilitation of the war affected north and east.

The government cannot consider lightly its undertaking with the IMF given the close supervision of the programme. The Fund is in the process of deciding on opening an IMF mission in Colombo, which was closed down earlier in 2007.

The government would also have to be mindful of the fact that the tranches of the US$ 2.6 billion facility would be made available to the government only on successfully meeting the quarterly targets agreed upon in the programme.

However, contrary to the euphoric comments made by the government following the receipt of the IMF stand by facility, indications are that it would be a painful future for the Sri Lankans.