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.)

Continued from Sep 10

Financing of commodities such as petroleum imports were difficult in the short term financial markets, and contributed to eroding the reserves at hand. Value erosion of assets due to sharp depreciation of international currencies against the US Dollar affected the reserve of the country. Fortunately, substantial reserve holdings up to the 3rd quarter of 2008, had absorbed these negativities without infecting the economy at large.

To face the external negativities on Sri Lanka's Balance of Payment (BOP), exchange rates and the economy, it is necessary to beef-up the reserve holdings of the country. As a member country of the IMF, it is an obvious and a prudent decision to obtain the Stand-by facility (STB) under the current conditions as it is cheaper and more sustainable. It is the undisputable right of any nation to obtain its funding entitlement from the IMF as Sri Lanka did in August 2009. Hence the IMF loan should improve the reserve holding and have a positive impact in enhancing the country's economic stand whilst boost the investor confidence.

The IMF facility which Sri Lanka obtained and amounting to SDR 1.65 Bn. (US$ 2.6 Bn.) in eight trenchers are subject to the quarterly reviews on economic performance spreading up to the march 2011. The loan is repayable with a 4 year period starting from April 2012 onwards.

Considering the current rates of commercial loans available in the market, and/or any other bilateral loan agreement, the IMF loan interest rates offer a comparatively better deal for the country. Presently, commercial loans are available in the financial markets at LIBOR + some 100 to 500 basis points which would end up at about 5% to 5.5% p.a. In comparison, the IMF's STB facility's total pricing is under two components as follows:

1. The Rate Component

* Service charge weekly based on the SDR rate (0.3% p.a.)

* Margin of 1% p.a. on loan outstanding amount.

2. Surcharges

* When the outstanding loan amount exceeds 300% of the quota, a surcharge of 2% p.a. will be added.

* When the outstanding loan amount exceeds 300% of the quota for more than 3 years, 3% p.a. surcharge will be added.

IMF Conditions versus Principals of Good Economic Management

No prudent lender will give away its money to a borrower unless the borrower establishes right practices and good governance to ensure the repayment. Even for a small personal loan from a bank, a borrower would have to show the income sources, level of expenses and a satisfactory past track record. Bankers would not fund speculative activities or give away facilities to persons with dubious characters. Similarly, the IMF too is concerned on good governance, responsible fiscal discipline and prudent monetary policies to ensure that the expected outcome of IMF loan could be obtained. The key objectives of Sri Lanka's IMF standby facilities as stated in the Letter of Intent are as follows:

* To Rebuilt external reserves

* To strengthen the fiscal position

* To strengthen the domestic financial system and maintain monetary stability

It is important to accumulate foreign reserves to a substantial level in order to face any BOP issues. All countries, especially the Central Banks focus on this area as a top priority. In this sense, it is a good sign that the Central Bank of Sri Lanka is focusing and attempting to build its foreign reserves, well before the IMF STB facility. The IMF STB facility will further strengthen the Sri Lankan foreign reserve position and have a more positive overall impact on the future economic prospects.

Managing the budget deficit is imperative for the proper economic development of a country. Unacceptable levels of higher budget deficits result in borrowing money from inflationary sources and increasing inflation whilst delivering negative implications for the standard of living of the people.

The Central Bank's proactive stance to reduce the budget deficit to 5% of the GDP by 2010 is evident from the fiscal management report 2009, (published in November 2008). It should be noted that managing the budget deficit was made mandatory under the fiscal management responsibility act that had been in place since 2004. Hence managing the budget deficit cannot be considered as a "new condition" for Sri Lanka. One should therefore ask whether mere repetition of the government's policy stance in this letter of intent is actually a 'condition' or simply an emphasis on the endorsement for good practice of governance already in place.

The present Government's central policy document is the "Mahinda Chinthana" which emphasizes that the government will not sell or privatize public enterprises as a deliberate policy. In line with the policy stance, the government has already abolished the PERC in August 2009, which was established to facilitate the privatization process of public enterprises. However one should be aware that efficiency and the productivity level of government enterprises are yet to be enhanced. It is the government's utmost duty to arrest resource drains in public institutions and protect the general public from paying for the inefficiencies of the state enterprises.

There are several ways to enhance the efficiency and resource drain of public enterprises without privatizing or selling-out. Public Private Partnerships (PPP) are a better approach to restructure loss making public enterprises to make them more efficient and reduce their dependency on the state treasury.

For analysts who closely monitor the Sri Lankan financial system, it is evident that Central Bank has always focused on Reserve Money or High Power Money to control the money supply. Reserve money acts as the raw material for monetary expansion, where the banking system uses it as a platform for increasing the domestic credit which results in the increase of money supply. The Central Bank has already announced in its road map for 2009 the forecasted reserve money positions well before the IMF STB had been obtained. Therefore can anyone interpret this prudent monetary management approach as a 'condition' or the re-emphasizing of Central Banks position in the very letter of intent of the IMF?

Reap what you sow...

The Global financial meltdown and economic downturn have several implications on Governments, donor agencies and individual businesses. Before the advent of this crisis, the neo liberal economics was the mantra for success and development that many countries adopted and promoted through various World Bodies.

Everyone hyped on privatization and reducing the government's role as an economic partner through de-regulation and other processes and as a result many international agencies such as the World Bank, IMF and the ADB advocated these ideologies and it was no surprise that many governments embraced these changes in their policy documents as well.

We in Sri Lanka had experienced the same situation previously and the policy document "Regaining Sri Lanka" was also a heatedly debated topic on the same subject. But today such economic policies are being questioned by governments and analysts across the globe in the wake of the learning from the world financial crisis. Today, most of the developed nations are compelled to adopt a different course of policies contradictory to neo liberal policies. Many talk of the increased involvement of governments as economic partners and as regulators in the current macro conditions which indicate that more Keynesian type of economic approaches are to be expected in the forth-coming years across the globe.

In this sense, one should give the due recognition to the government's overall policy document, the "Mahinda Chinthana" for having identified these new policy frameworks well ahead of the global crisis whether by choice or by chance!

Unique opportunity to walk the talk

During the last few decades, forums of both the government and the private sector blamed terrorism as the major impediment for growth and development. The talk did not end there; many analysts even went to the extent of calculating the 'lost opportunities' for income due to the situation that prevailed in the country.

Policy makers were worried about low economic contribution from the two provinces, the Northern and Eastern provinces which also covered 2/3 of the sea territory and how the uncertainty hampers the foreign and local business projects.

Now our valiant forces have totally annihilated terrorism and captured the few remaining terrorist leaders in faraway lands taking away the obstacles that people had been highlighting for over 3 decades. This is not the time to give priority for petty political squabbles or dig on each other's past sins. This is not the time for debating on ideologies of various theories and philosophical utopias'. As Sri Lankans we are savouring a unique moment of Sri Lankan history.

The world economic turmoil has given us a breathing space to rethink and to creatively look through new perspectives at the world and our positioning in the global economy. We should remember that the economic problems faced by many nations are much greater than us in this global financial meltdown and economic downturn.

In such a context, Sri Lanka has the unique opportunity for greater development.

Our earnest proposition is, for all to stand as true patriots of our country and embrace the opportunities in front of us as a nation, and take this country to the zenith of the global economic development.

Together we as Sri Lankan can achieve this!!!