ECONOMYNEXT – A senior Sri Lanka ministers says demonizing the International Monetary Fund as a fearful creature not match past relations with the agency, while the country attempts to fix the external problems sans the Washington based lender.
Sri Lanka has not gone to the IMF saying it will demand spending control on the bloated civil service, which is referred to by pro-state Western analysts and progressive press as ‘austerity’ as well as currency depreciation.
Sri Lanka Podujana Party of President Gotabya Rajapaksa has generally opposed free market policies and strongly supported import substitution tax-arbitrage, autarky and expanding the state mostly by shoveling money to unemployed graduates.
The administration went on an extreme Keynesian stimulus backed by record money printing after cutting taxes, triggering a massive external crisis, prompting many to call for an IMF program.
Several cabinet ministers from coalition partner Sri Lanka Freedom Party has spoken in support of the IMF.
This week Dullas Alahapperuma, a senior SLPP minister said the IMF should not be demonized as the country was also member of the agency and has taken loans in the past.
Sri Lanka should not forget that it had been a member of the IMF from 1950, he said.
“Do not therefore talk with an idea that this is an organization that is not related (adar-ler na-thi) to us, since we are a member country,” Allahapperuma said.
Sri Lanka became a member of the IMF on August 29, 1950 the day after a central bank which can print money to fix interest that triggered external crises was set up in the style of several in Latin America.
Until August 29, 1950 money printing (fixing unrealistic interest rates relative to domestic credit) was outlawed under a British designed currency board (hard peg) and Sri Lanka’s foreign reserves were equal to 93 percent of imports (11 months).
It was only second to a few countries like Switzerland, which had foreign assets of 145 percent of imports according to central bank data.
“To be roughly in the same position an individual would have to have enough money in the bank to buy his usual household needs for almost an entire year,” the Ceylon central bank said in its 1950 annual report.
“When the Ceylon figure is compared with the corresponding figures for other small countries that are also highly dependent on upon international trade, Ceylon shows up rather well.
“For Belgium the percentage is 39 percent, for New Zealand 49 percent (1949) and for Denmark only 12 percent (1949).
“On the other hand, Switzerland, a country noted for its financial strenght, the figure is 145 percent.”
Countries like Singapore retained the currency board arrangement (floating interest rates) after independence allowing them to have strong currencies, domestic economic and social stability and free trade.
Hong Kong set up a currency board in 1982 and GCC countries like Dubai have monetary authorities that mimic currency boards.
Alahapperuma said Sri Lanka has had transactions 19 times including during the rule of President Mahinda Rajapaksa.
At a ‘decisive stage’ in the war Sri Lanka had taken 2.5 billion US dollars from IMF.
“It was the highest ever money taken,” Minister Allahapperuma said.
“I propose that we do not paint it as some big fearful creature (ma-har bille-kuge roo-pa-yak,) but we have to look at it relative to the history.”
“But as a government we have not take a decision for discussions so far. At the last cabinet meeting also no decision was taken.”
IMF programs generally do not solve long term problems because no attempt is taken to restrain the central bank from ‘flexible’ or ‘arbitrary’ decisions, critics have said, allowing countries to engage in Keynesian stimulus.
Sri Lanka had already taken several measures usually considered ‘IMF prescriptions’ to reduce state interventions that are contributing to the external crisis.
These include a freeze on further hiring, abolishing price controls which would reduce shortages of some items.
However in January Finance Minister Rajapasksa suddenly raised state salaries and pensions ending a two year freeze, as inflation from two years of money printing made trade unions restive.
“There are things that could be done by us and there are things that can’t be done by us,” he said. “That will be decided on not what the World Bank or IMF wants, but what our people and the country want.”
This week the central bank also raised a price control on interest rates, hiking its policy rate for which money is printed to maintain by 50 basis points to 6.50 percent in a bid to reduce steeply unrealistic interest rates.
Liquidity injections over the past two years made to fix interest rates had led to steep falls in reserves, as the new money was exchanged for reserve to maintain the exchange rate, raising doubts about the ability of the government to repay foreign debt.
The government is seeking more loans and central bank swaps to keep shore-up reserves.
“We have ruled out an IMF programme because this programme we have initiated would work,” Central Bank Governor Ajith Nivard Cabraal told a news briefing on Thursday (20) after raising the fixed interest rate at which money is printed to 6.5 percent from 6.0 percent.
“Even if the IMF comes, what is the different programme that they would be able to prescribe other than to say restructuring your debt?” Cabraal questioned.
“We are waiting for some unknown programme rather than examining the programme that you have before you. Most of the items that we have been talking about have been materializing.”
“We talked about swaps, those are coming. We spoke about various country-to-country facilities. You have seen those announcements are being made.
“So you have to be conscious that there is a programme that is being implemented and we don’t need two or three different programmes and confusion being caused.”
An IMF program usually encourages a float of the currency to end sterilized forex sales (selling reserves and printing an equal amount in domestic money to fix the interest rate) to end reserve depletion, raise taxes to reduce the deficit and domestic credit, and raising rates enough to boost domestic saving to a level where BOP deficits (liquidity injections) end and resources are generated to repay debt.
Sri Lanka has negotiated borrowings from India and China for swaps to get more foreign exchange while the BOP deficit continues to rise.
China helped with a swap of 10 billion yuan (around 1.5 billion US dollars) which helped to boost the country’s gross reserves as expected inflows did not come and
India this month deferred a 515 million US dollar payment for Asian Clearing union and promised a fresh 400 million US dollar swap. It also is in the process of helping with a credit line of 1 billion US dollar for essential foods and medicines and another 500 million US dollar for fuel.
Finance Minister Basil Rajapaksa announcing a 229-billion-rupee relief package on January 3 said the government will do what the people want. (Colombo/Jan21/2021)