IMF impact on Sri Lanka:

Dynamics of global economic changes

The following is the text of speech delivered in Parliament by Constitutional Affairs and National Integration Minister DEW Gunasekera in the debate on the IMF loan on August 18.

Minister DEW Gunasekera. File photo

What is Sri Lanka’s track record with regard to the IMF loans? Let us not go as far back as 1953 when the people revolted against the then UNP Government condemning the IMF and the World Bank prescriptions or conditions. In all, there had been 23 occasions on which Sri Lanka sought assistance from the IMF.

Since the UNP Government embraced the open economy or neo-liberalism as its economic strategy in 1977, there have been 14 occasions when Sri Lanka had to go with a begging bowl for loans or standby arrangements or drawings or finance facility or structural adjustment facility or poverty reduction facility or emergency assistance facility, whatever the term that was used.

IMF and UNP regime

Of the 14, except the emergency assistance for natural disasters - tsunami - on all other occasions the UNP was the ruling party. So, no party in power was so closer to IMF and so involved in the IMF loans as the UNP. So, the UNP has no moral right even to question about IMF loans. The total amount drawn by the UNP Government was 1367.9 SDR million.

Let us go back to the most recent occasion and ascertain what type of conditions the UNP Government agreed to? In 2001, there was a 10-point Reform Agenda. In 2003, there was a 13-point Reform Agenda. Were there such conditions this time? Not at all. This is the crux of the matter.

People are naturally apprehensive about the IMF conditions, because in the past, the conditions imposed by the IMF created massive political upheavals and turmoil which caused serious labour unrest and even led to the fall of governments. We have our own experience.

Transparent

In the month of August 1953 Dudley Senanayake had to resign consequent to the Great Hartal against IMF conditions. Sri Lanka was one of the first countries in the world to react and resist the IMF prescriptions sacrificing eight precious lives.

The working people, in particular, the working class naturally entertain concerns, fears and suspicions whenever the Government seeks assistance from the IMF. This is a natural and logical reaction judging from our past experience.

All performance criteria and benchmarks on the present occasion are our own, as clearly expressed in our policy framework and the budget speeches stipulated long before the need for IMF facility, did arise. There is nothing new, nothing detrimental, nothing confidential, secretive or deceptive.

The people in the recent mandate, at the Provincial Council Election rejected those unfounded allegations and concerns raised by the Opposition Members.

They were in fact not related to reality. If they were related to reality, people would have not given an unprecedented victory of 82 percent in the Moneragala District, the most backward district with only four percent of national GDP.

I would now shift to another aspect and that is in relation to the present ground reality of the IMF, the subject matter of the Debate.

Firstly, the IMF has in practice and effect undergone and is undergoing changes qualitatively in the context of:

The nature, dimension and gravity of global financial crisis, changes in the balance of world economic power. The crisis has speeded up the shift in the balance of world economic power, the changing order of the world economy with the emergence of new economic centres, shifting of world economic centre from the United States to the Asian continent. Six Asian countries together have a GDP of US Dollars 17 trillion surpassing US whose current GDP is only US Dollars 13.8 trillion, higher growth rates of the Asian economies. Asia is the first continent in the world to get out of the recession and global financial crisis, awakening of the Latin America and is impact on the American Continent and the change in the balance of forces and new economic alliances such as BRIC and Shanghai Corporation.

Losing power

Secondly, in consequence of the above-mentioned changes, the US is fast losing its dominance in the IMF. Its voting percentage is reduced to 16.8 percent and there is a growing demand for readjustment of those existing voting percentage by the new emerging countries. The USA and the OECD together now account for only 48.8 percent. Countries like Japan, South Korea, Canada and sometimes even Australia, the Netherlands and Belgium take moderate and independent positions in the context of the ongoing changes in the world economy.

The biggest debtor

Thirdly, the US Dollar is on the decline in its role as the international exchange reserve. The dollar now accounts for only 65 percent of the world’s exchange reserves. The US has become the biggest debtor. The US is no longer the biggest producer in the world - but, of course it is the biggest consumer - whose place has been taken over by China. China owns one-third of the US Bonds and even one-third of the world exchange reserves. The developing countries own 75 percent of the world’s exchange reserves, of which China owns one-third. These are the realities of the day, which neither the Members of the UNP and the JVP nor the TNA are aware of.

Fourthly, the IMF has run into a crisis. Recently, the IMF had to sell 403 tons of its gold for the purchase of dollars. China has come to her assistance, pledging US Dollars 50 billion on IMF Bonds to boost the Fund’s capacity.

SDRs owned by the IMF account for only one percent of the world’s exchange reserves. The IMF is no longer in a position to place those political conditions to the developing countries as they did all these years, when the US was dominant in the IMF. As a result, the Washington Consensus has become redundant and inoperative.

Fifthly, today, the sources of funds are in Asia and the Middle East even though those countries have no voice in the IMF.

Most of our Opposition Members either have no knowledge of these new developments or realities or pretend not to know them or are completely ignorant of these ongoing changes. Sixthly, this time the IMF’s offer is in the form of a stimulus package. It was never mentioned in the House during this whole Debate.

A stimulus package

It is a form of a stimulus package offered consequent to a decision taken by the G-20 and not the G-7, which at its session on April 2, 2009, deliberated on the impending global financial crisis and considered as to how the developing countries affected by it could be assisted. The G-20 authorized the IMF to issue US Dollar 250 billion in new SDRs.

This augmented its foreign reserves, obviating its need to go for lending and this really helped the developing countries which have gone for loans from the commercial sector.

This time the IMF requested Sri Lanka to apply for assistance totally under different circumstances. That is why those formal conditions, which they used to impose, are absent. So, the circumstances have changed. The IMF itself is compelled to change its coercive role and drop its inherent big-power arrogance. The world economy, the economic order and the balance of the world economic power are all changing.

Two factors

The main objective of the IMF assistance was to improve the balance of payment potential of Sri Lanka. Why was it needed? Because of two main factors: the first is, our reserves were dwindling due to factors beyond our control and the second is, we were in a state of war, fighting terrorism which warranted a massive expenditure from the point of view of foreign exchange.

By virtue of the new economic strategy of 2005 and onwards, we have been taking positive, effective measures on agriculture, domestic food production, infrastructure development, rural economy, regional development, SME sector, flexible foreign policy application, search for alternative sources of funds and we were not so bad as some other developing countries.

Where the JVP has gone wrong is that they are unable to comprehend the new realities of the world economy. Looking for solutions in the theory of economics or books on economics will not take you anywhere. It is necessary to understand the political economy. Take a Marxist view to understand the political economy, which is undergoing transformation throughout the world.