The fallacy and the reality of IMF Standby Arrangement for Sri Lanka

Manoj Akmeemana - MBA(Sri J'pura), BSc BAdm. (Special Honours) (Sri J'pura), Chartered Marketer (CIM UK), AIB (SL), CMA (Aus.)

International Monetary Fund (IMF) has been the centre stage for decades for its role, way of governance and policy stances which have often aroused many debates and arguments amongst political economists, policy makers, the member countries and even intellectuals the world over. Even in Sri Lanka, the IMF has become a "hot" topic nowadays especially among local politicians merely for the sake of political advantage and not on more objective aspects such as the IMF policy framework and importance of its financial assistance to governance. Hence, it is imperative to understand the IMF's policy framework and global economic outlook prior to expressing judgments or opinions and arriving at conclusions.

IMF - birth as one of the Bratton Wood Twins

Just after the World War II, representatives of 45 countries agreed to have two distinguished financial arms to face specific financial challengers of a war-torn world. While the World Bank (WB) was established to assist reconstruction and rehabilitation of countries, the IMF was established to provide financial assistance to countries that experience economic difficulties and balance of payment issues.

The funding base of IMF is deposits from member countries .The governance of IMF is through a Board of Directors which consists of 25 directors from member countries. Today, the membership of the IMF is represented by 186 countries.

A member quota is dependent on the relative size of a member's (i.e. member country's) economy to the world economy. A member quota in IMF determines the amount of its subscription, its voting weight, its access to IMF financing and allocation of Special Drawing Rights (SDR). However, the United States has the exclusive veto power, due to their contribution and initiative for funding.

IMF share of criticism

IMF has its share of criticisms from its inception. Many argue that member quotas and voting powers are not democratic and do not representing the global realities due to the dominance of the USA and EU in the governing body. Table 1 below illustrates the present quotas and voting rights of the 10 top members, which also indicate the disparities in representation of the world population.

One could argue that if the value of contribution or investment is higher, then that person should have a comparatively higher 'say' or vote.

Even in business, the voting rights of a quoted company are dependent on the number of shares held by a person. However, despite these arguments the debate is on how to change the governing structure of the IMF to represent the new world realities.

Among the many political and economic criticisms on the IMF policy framework, the Marxist revolutionary icon Che Guerra (1959) once said that, "interest of the IMF represents the big international interest that seems to be established and concentrated in Wall Street".

A former Vice-President and Chief Economist of the WB, Joseph E. Strighty argues in his book 'Globalization and its Discontents' that "by converting to a mere Monetarist approach, the fund (IMF) no longer had valid purpose, as it was designed to provide funds for countries to carry out Keynesian reflections, and the IMF was not participating in a conspiracy, but it was reflecting the interest and ideology of the Western Financial Community."

The fire branded leftist leaders, President of Ecuador, Rafael Correa and Venezuelan President Hugo Chavez announced that their countries would withdraw from the World Bank and IMF, but as to date both countries remain as members of those institutions.

The bitter reality is today no country can isolate itself from the world financial system and stand alone as idealistic independent financial systems in the globe.

New Global imperatives & IMF

The sub-prime crisis in the US financial markets spread across the US and the rest of the developed world as a major financial crisis much like an epidemic during the 3rd quarter of 2008, starting with the collapse of Lehman Brothers in September 2008 and spreading to several major financial institutions - and the rest is history!

One by one, from financial institutions to industrial, retail and consumer goods manufacturers in USA and other developed markets started to collapse while unemployment ratios shot to the highest levels in recent history.

Developing nations and emerging markets that had built their economies through exports and imports with these developed markets were forced to face severe repercussions.

Being strong advocates of free markets and neo-liberal economics, these developed countries were compelled to hurriedly workout massive bailout packages to rescue the fallen banks and industries in their respective economies.

It's estimated that the bailout package for USA alone is a trillion dollar budget. With these bailouts, it is quite evident that radical changes in ownership structures of most of these companies happened overnight with most of them being converted from private to state ownership and being termed as "Nuclear Solutions" or "state ownerships". The Governments of these large economies intervened by spending the tax payers' money to rescue these fallen companies as opposed to their popular neo-liberal idealism which they had for decades tried to force developing nations to adopt.

With these changes and repercussions, the optimistic forecasts that were given for several years on the future global economies were downgraded within a matter of months!

Under this scenario, the members of the G20 summit held in London in April 2009 agreed to boost global liquidity, an agreement that was welcomed by the International Financial and Monetary Committee. As such the Board of Governors of IMF had in August 2009 approved a general allocation of SDR equivalent to US$ 250 billion to provide liquidity to the global economic system by supplementary funding for member countries to strengthen foreign exchange reserves. It is this action that allows any member country to apply for a Stand-by Arrangement (STB) or Loan from the IMF.

The Sri Lankan Economy in the global context

The Sri Lankan economy during the last two decades developed a comparatively far greater resilience power to withstand any internal or external shock.

The Sri Lankan economic fundamentals had been sound and showed improvements in several fronts during the year 2008 despite the governments determined efforts to annihilate terrorism with intensified military operations in the back drop of many local and foreign challenges. The following charts illustrate several aspects of the economy of Sri Lanka for the last 8 years.

As Sri Lankans and as individuals who are not blinded with coloured politics, one should give due credit and recognition to the respective authorities for prudent monitory and fiscal policies that contributed to an extent in safeguarding the Sri Lankan financial system from the global financial crisis.

Though many have often criticized the highly regulated financial regime of Sri Lanka, it is this very system that protected the nation from the global financial crisis.

However, during the fourth quarter of 2008, Sri Lanka's external sector began to experience a level of negative implications resulting out of the global financial crisis.

Foreign investors who had to face the bitterness of the global crisis were forced to withdraw their investment in Government securities. FDI's and other forms of commercial funding for various projects started to drop.

To be continued