Sri Lanka warned early on 2015 budget fallout by IMF
ECONOMYNEXT – Sri Lanka was warned early on about the negative fallout on economic stability from a revised budget in January 2015, an International Monetary Fund report which had been released after being suppressed for months, showed.
"The fiscal situation constitutes Sri Lanka’s single biggest macrofinancial vulnerability and should be addressed expeditiously," the IMF has warned in a March/April 2015 report, which was suppressed for almost seven months and was only released in December.
"The boost to consumption from the interim budget will spill over into imports and could be larger than expected.
"The increase in consumption may spur growth, but dampening effects could come from delays in public and private investment, and wavering confidence should policy uncertainty continue."
The revised budget sharply hiked spending specially on state worker salaries and pensions, while ordinary people were already finding it difficult to finance the existing expenditure of the state and revenue to gross domestic product was weaker than earlier.
There are however concerns that the GDP itself has been bloated and the actual revenue to GDP is much higher than claimed.
The IMF bailed out Sri Lanka in a 2009 balance of payments crisis, and the country slipped into another balance of payments crisis in 2011/2012 after a bout of credit financed fuel subsidies.
In 2015 the Central Bank again printed money heavily to manipulate interest rates down and finance higher state worker’s salaries, pensions and other subsidies, expanding all credit.
Energy prices were also cut by the Treasury, increasing disposal incomes at the hands of all consumers and driving non-oil imports up.
The IMF expected some benefit from lower oil prices, but low interest rates and money printing which boosted credit and consumption generally, keeping non-oil imports up, even as exports and financial inflows also slowed.
Sri Lanka’s central bank has a tendency to print money and keep rates down while loan demand goes up requiring steep corrections to avert balance of payments trouble, which generate a ‘hard landing’ and a currency collapse when the credit crisis intensifies.
Sri Lanka has again lost foreign reserves this year amid a state and private credit boom financed by excess liquidity (unspent inflows accumulated during a period of negative credit) and outright printing of money by the Central Bank.
Though borrowings from the IMF has fallen below a 200 percent threshold usually required for post-program monitoring, the agency is continuing close monitoring because of weak state finances and external position.
Sri Lanka started publishing IMF country reports regularly from the mid-1990s after A S Jayewardene, a top public servant who was committed to prudent monetary policy became Central Bank Governor and reformed the agency to some degree.
However during the ousted Rajapaksa administration, IMF reports were delayed for years, helping strengthen a view that the regime was manipulating data, hiding the truth and misrepresenting real economic conditions.
The current administration which came to power in January also did not publish IMF mission staff reports, continuing the practices of the Rajapaksa administration. But has now published a March-April report after a delay.
In September top central bank officials defended the move to suppress IMF reports when questioned by reporters.
They said there was no requirement to publish mission staff reports, that Sri Lankan authorities have to ‘agree with the language’, or could not release reports before they are submitted to the IMF’s executive board.
There was also a claim that the IMF could not conduct a proper staff study before the budget for 2016.
The latest country report has been submitted to the IMF’s executive board this month, but it has not yet been released. In a press release the IMF again warned about the 2016 budget and its numbers, while also warning about monetary policy.
Taking early action can help avoid greater problems ahead.
Analysts say for Sri Lanka to go forward, the false belief that people as a whole will somehow be better off with higher state spending or greater taxation has to end. The belief, has allowed so-called ‘populist’ moves which harm the poor most, to be implemented to general applause.
Budget deficits backed by printed money only generate boom bust cycles and currency collapse which harm the poor the most. When false doctrine is glorified, it also makes it more difficult to eventually implement corrective measures.
Excerpts from a September 2015 press conference relating to suppressed IMF reports is reproduced below:
Question: Governor, related to the earlier questions also, the IMF staff reports have not been published recently. When are they going to be published?
Deputy Governor: I think what we published last time was the Article IV consultation report. Then after that we had this post-program monitoring. Those are basically I think usually they are not published. Only the annual article IV reports are the one they recommend us, encourage us to publish.
So the next Article IV consultation, I think will happen early next year.
Question: But staff reports were published earlier. And when they were stopped from time to time that was a regression.
Deputy Governor: Article IV some of the reports were not published in the past.
Question: And the mission staff reports were published.
Deputy Governor: I think some of those are published with a time lag. As you can see last year three reports were published at the same time. Previous time. From time to time when we have consultations processes we discuss the report with each other and then come to a consensus, then only we give our consent to publish. So that process is going on.
Question: So when…
Deputy Governor: What happens usually when we give the consent we give them consent to release all the previous ones they have submitted to the board.
So what we expect next time, the annual report is the key one that would be submitted to the board next time. Once we see that and most probably we will look at the past reports and those will be released at the same time.
Questions: So this decision not to publish the staff report is a conscious decision?
Deputy Governor: No, the first thing is they have to submit it to the board. That has not happened yet. They will be going to the board in November. Once it goes to the board.
Question: I don’t mean the new one. The previous mission…
Deputy Governor: The previous one we are still working on it. They have not been given consent. Also there is no such request from the board also. There is no kind requirement for all these reports to be published.
But the Fund says only the Article IV consultation report that for members to be published. All others are interim reports. And you know the major report which will include all other observations will be in the Article IV report. That is why the annual report is mainly published.
Question: Forgive me for arguing. In that case, there no reason to even to publish that on that basis.
Deputy Governor: Certainly, in the case of all the countries, the authorities have to give consent. It has to have we have to have discussions with the staff. And we have to have agreement with the language they publish. If there is agreement, consent on the language then only both parties will agree and then publish. So that process is going on. Once we come to a consensus.
Sometimes it has happened in one year, two year, three years. Sometimes it happens in three months. So I would say, it is not that we do not publish it. It will take some time for us to come to a consensus and we will publish it.
Question: So where does good governance and transparency come in?
Deputy Governor: This is all based on the rules and regulations with the IMF and also with the authorities. Nothing is violated. It is all within the rule of the Fund and its member countries. The Fund member counties have the kind of authority to discuss with each other and publish. It is not one sided.
Question: We understand all that. But you have a new government which is more committed to transparency. So shouldn’t there be new thinking?
Governor: You also have to view this way. We all know that there is an urgent need for fiscal consolidation in Sri Lanka. The new government has not had enough time to come up with a comprehensive set of proposals. There was a mini-budget in January which imposed some one-off taxes but you know it did not address the medium term needs of consolidation.
That is known. And the IMF has said that in press statements in March and last week. To that extent there is a lot of expectations about the budget that is coming out in November will hopefully set out road map for the medium in terms of how how Sri Lanka is going to grapple with the basic problem of revenues as a percentage of GDP has shrunk in the last decade.
That I think that is something one has to find a solution. I think until that is the case I do not think even the IMF will do a proper staff study of the economy. They are waiting for those details, before they are come out. And they have put out press statements I think that is the usual practice. (Colombo – Corrected second paragraph suppressed for seven months)