IMF forecasts and systemic crisis

IMF has no special medicine to offer to the sick economy except to advise and release funds to protect and stabilise the finance sector

“If you feed enough oats to the horse, some will pass through to feed the sparrows (referring to trickledown economics.” (Galbraith) 

IMF’s Global Financial Stability Report was released a few days ago, which referred to a “perilous combination of vulnerabilities that have been lurking under the surface of a global financial system for years”, and Tobias Adrian the Financial Counsellor and Director of Monetary and Capital Markets Department of IMF added that “the emergence of stress in financial markets complicates the task of central banks as they seek to maintain towards higher interest rates in the face of stubbornly high inflation”. Kristalina Georgieva, the Managing Director of IMF noted further that “with rising geopolitical tensions and still-high inflation, a robust recovery remains elusive.” 

Based on all this is a forecast of an economic growth rate of 2.8% for 2023 and 3% for 2024 and next five years, the weakest projection since 1990 and well below the average annual growth of 3.8% over the past two decades.

In a scathing attack on globalisation and blind financialisation of economies, Joseph Stiglitz a Nobel Laureate, and author of Globalization and Its Discontents (2002) among several other publications, accused the IMF and its market fundamentalism, the so called “Washington Consensus”, and US Treasury for the terrible consequences such as increased destitution, widening wealth gap, social conflict, and an atmosphere of hopelessness almost in every part of the world. In other words, the crisis the world is facing today is more fundamental and systemic, rather than particular to individual economies or societies. 

With the breakup of the Bretton Woods arrangements in which the value of US dollar was fixed against gold, and other currencies were bound to the dollar, an era of stable and predictable exchange rates and restricted speculation came to an end. With Milton Friedman’s monetarism and free market economics coinciding with the fall of Keynesianism from 1980s finance capitalism and financialisation of economies gained momentum, and the share of the financial sector in GDP and in relation to the real sector increased rapidly. It was a fundamental and systemic change, and in this system financial markets, corporations and elites exerted greater influence on national economic policies and their results. The IMF became the watchdog of this system.

In simple terms, what happened after this change was the gradual weakening of the direct link between the real economy and its finance partner. The flood of financial instruments created by the money market was more to earn short term profits than to invest in the real economy for sustainable growth. While the real sector was starved of direct investment banking corporations, industrial firms, and capitalists were creating new and novel instruments that could be traded in the market to earn quick profit. Speculation and risk calculation became a new art in a world of crypto currencies, tax havens and nonbank financial intermediaries. Central banks that are expected to control the behaviour of money markets, guarantee adequate money supply, and protect the value of domestic currencies are almost powerless and are described as an anachronism in this risky financial world. Is it then a wonder that “a perilous combination of vulnerabilities (are) lurking under the surface” of this system as the IMF report claims? Isn’t there a systemic crisis?

Small but open economies like Sri Lanka have no choice but to seek assistance from the watchdog in times of serious economic crisis. That is what the current regime under President Ranil Wickremesinghe (RW) has done after Gotabaya Rajapaksa’s Presidency delayed the SOS message by a couple of years. Yet, it is better late than never, and the economy is now under IMF’s remote control. However, IMF has no special medicine to offer to the sick economy except to advise and release funds to protect and stabilise the finance sector. And any benefit to the real sector on which a vast majority of Sri Lankans depend for their existence is expected to be a positive fallout from the expected growth of the financial sector, a phenomenon described by Galbraith as “trickledown economics.” 

It was Joseph Stiglitz who in an interview given after the 1997-99 Asian Financial Crisis pointed out that “reform cannot be imposed either from the outside or from the top down. The most successful developing countries have not followed the Washington Consensus” i.e., IMF. 

Sri Lanka has its own systemic crisis. The seeds of that crisis were sown in the very birth of its independence from colonialism. An ideology of Sinhala Buddhist ethnonationalism, which originated in the 19th century, worked from behind the scenes to transform the country’s multiethnic democracy into, if possible, a monoethnic majoritarian autocracy. And the root cause of today’s economic crisis should be traced back to that pernicious ideology which granted social license to Sinhala Buddhist governments to develop the economy to benefit that majority. There was no accountability to what those governments did. Nepotism and corruption became the order of the day, the country lived beyond its means, and borrowed without limits to cover recurrent budget deficits, which ultimately bankrupted the treasury. Now it has sought the help of the IMF, which has its own global system to protect. 

IMF’s warning about slow growing economies struggling to cope with stubbornly high inflation and high interest rates also needs a closer look. Raising interest rates to counter inflation works effectively if that inflation is demand-pull and not cost-push. But the current rate of inflation is not entirely caused by increased demand but more by supply constraints caused by the pandemic, the war in Europe and climatic catastrophes. How could increasing interest rates remove supply constraints and reduce natural disasters? Has the IMF or the system it protects any solution to the war in Europe and climate change? A blanket increase in interest rate would only make things worse than better. Even in rich countries like Australia households are complaining of increasing cost of living.

Producers engaged in the real economy need to borrow funds at low cost to invest and increase production. Without producing exportable surpluses how could an economy like Sri Lanka overcome its persistent trade deficit? Therefore, credit control by central banks needs to be qualitative and discriminatory to benefit the real economy rather than to favour speculators and short-term profit seekers. When banks themselves indulge in speculative investment what hope is there for growth sustainability and financial stability? This is a systemic issue. 

Besides the systemic crisis in the neo-liberal world, Sri Lanka has its own systemic crisis. None of the political parties in the country except NNP is calling for systemic change. Whereas President RW seems to feel content with the current system while putting the trust in the IMF experiment to rescue his presidency and the economy. Obviously, the finance sector and the elite are totally supportive of that experiment, but understandably the real sector and ordinary households that are bearing the cost of this exercise by way of higher prices, taxes and tariffs have their reservations. Given the unavoidability of the hardship and forbearance of ordinary folks there is no guarantee that there is light at the end of the tunnel because of the forecast global downturn. The IMF’s report has carefully avoided the word recession and is more worried about protecting the financial side of the economy than peoples’ lives. 

To quote Stiglitz again, “development is about transforming the lives of people, not just transforming economies.” It has been found that the majority of countries that received assistance from the IMF had not experienced notable improvement in the living conditions of their people. IMF reforms often fail on that ground.

Adding to the global gloom are Sri Lanka’s own vulnerabilities lurking under the surface such as the ethnic question and foreign relations. To resolve the ethnic question RW is attempting to implement the controversial 13th Amendment. There is no way he could achieve this without changing the system. With a sizable Tamil diaspora community working overnight to influence Western powers, the ethnic issue has become a sensitive factor in Sri Lanka’s foreign relations. 

It may be to tackle those vulnerabilities and save the status quo that RW is resorting to protect himself and the regime with a new Anti-Terrorism Act (ATA). This Act in its draft form appears to be a camouflaged replica of the previous Prevention of Terrorism Act, which was internationally condemned for its draconian measures to invade human rights and democratic freedom. If ATA were to be passed in the parliament in its original form and without substantial amendments the country would enter a dangerous zone in local politics, which would make economic recovery even more difficult. 

 

(The writer is attached to Murdoch Business School, Murdoch University, Western Australia.)