Sunday Nov 10, 2024
FT
Sunday Nov 10, 2024
Wednesday, 1 March 2017 00:00 - - {{hitsCtrl.values.hits}}
By C. R. De Silva
The International Monetary Fund (IMF) has closely monitored Sri Lanka’s economic development during the last two decades and has also made a $ 5.2 billion loan available from the Stand-by Facility several years ago.
Now, the IMF has made a commitment of about $ 1.5 billion through an Extended Fund Facility to Sri Lanka in June 2016, which will be disbursed in half-yearly tranches of about $ 162 million over three years, on evidence of the Government of Sri Lanka’s good economic performance, meaning satisfaction of specific agreed conditions, which are pretty standard hurdles most developing country governments have to jump over, when they fall into serious balance of payments (BOP) crisis – aeuphemism which economists use to denote near country bankruptcy – and are compelled to seek an IMF bail-out as a last resort.
The onerous and unpopular, standardised conditions,to be performed to the satisfaction of the IMF during its continuous “intensive surveillance”, which all IMF beneficiaries are subjected to, consists of the recipient country having to build up its economy on the very same neo-liberal pillars of economic policy on which the so-called Washington Consensus (between the IMF, U.S. Treasury and originally, the World Bank as well) was built in the heyday of ‘Globalisation’ in the 1980s and ’90s, as the panacea for all economic ills; and applied without much variation, from country to country, in furtherance of the IMF’s macroeconomic ideology – whichinvariably included:
On 19 November 2016, the Board of Executive Directors of the IMF (in practice, more a rubber stamp for ratifying staff decisions already made in the field), met and having reviewed reform progress made after the disbursement of the firsttranche of about $ 162 million under the $ 1.5 billion IMF Extended Fund Facility,expressed “broad satisfaction” that, following the rough lines of IMF staff’s policy prescriptions, which have been scrupulously adopted by the Government, Sri Lanka’s “macroeconomic conditions have begun to stabilise, inflation has trended down, and the BOP has improved; fiscal performance has been encouraging, higher value added tax (VAT) will help boost revenues, the 2017 Budget proposals will help to boost Government revenues through revenue mobilisation, the new Inland Revenue Act should result in a more efficient, broad-based and transparent tax system, foreign reserves willbe built up through outright (dollar) purchases, while allowing greater exchange rate flexibility, and that reforms will be undertaken to enhance governance and oversight of SOEs, which is critical”.
In summary, Sri Lanka had committed itself to all the attributes of conventional IMF policy dogma, detailed earlier.
Since the last IMF review mission to Sri Lanka, and the change in staff leadership, the modus operandi of “intensive surveillance“ to which this country is being subjected, appears to have changed materially, and the people of Sri Lanka are being served an almost daily stream of newspaper headlines demonstrating in no uncertain terms, through a very loud megaphone, unlike at any other time or place, who is in charge of economic policymaking here, far exceeding the IMF’s usual periodic supportive, almost ‘invisible’ monitoring role during an EFF disbursement period, giving political elements in the country the welcome opportunity to complain that Sri Lanka’s sovereignty has been seriously compromised, and the IMF is directing economic affairs, with the Government’s role reduced to a subordinate and non-discretionary one of merely carrying out detailed IMF policy instructions – certainly not the election mandate. The evidence for these conclusions are as follows:
1.A news headline on 11 December 2016 Sunday stated:‘IMF: Sri Lanka faces currency risk on debt servicing,’ due to vulnerabilities linked to inadequate reserves (then $5.65 billion) and currency depreciation by 3.1%. On the very same day, another headline read: ‘2016 fiscal targets within reach, despite VAT delay, says IMF’. (Comment: however, the “currency risk” is a direct outcome of IMF insistence on market determined rupee value, which is expected to tumble further in 2007, especially with expected periodic US rate increases).
2.On 14 December 2016 a news headline read: ‘IMF tells Government to wind down forex swaps,’ with detailed IMF instructions; ‘warns’swaps open a new front of vulnerability, wants reserves grown from direct foreign exchange purchases; swaps could be gradually reduced to 0%; IMF calls on Central Bank to be ready for possible policy tighteningin 2017; IMF wants a flexible exchange rate and inflation targeting; “IMF staff team head Jaewoo Lee talking to reporters…warned that Sri Lanka should avoid opening up a fresh front of vulnerability given its high debt and other macroeconomic challenges…He warned that credit growth still remained high…he insisted there was a need to strengthen…,” etc.(verbatim headline inDailyFT,14December2016).
3.On the very same day, another newspaper headlined in a front page business report: ‘IMF cuts growth forecasts for Sri Lanka on external volatilities’; expresses concerns over falling reserves; urges authorities to act swiftly to fend off vulnerabilities – the mission leader referred to was “addressing the Sri Lankan press from Washington D.C. via live teleconferencing”. On the same day, this report in another paper also carried a double column, close-up photo of the responsible working-level IMF staff member.
4.On the next day, 15 December, in another headlined front page story: ‘IMF calls for faster structural reforms to keep program on track’; IMF says strong political commitment and sustained actions will be instrumental in advancing reforms; progress in fiscal structural reforms is a bit slower than had been originally intended – IMF.
5.On another Sunday, 18 December 2016, a major headline cautioned: ‘IMF warns of impending challenges against Sri Lanka’s economic reforms’… and that “the political challenge of tax reforms will remain a policy risk”. In addition, the IMF found that the Central Bank Monetary Law Act falls short of international practices, especially in the area of the Central Bank’s autonomy…IMF mission chief disclosed that economic growth would be 4.5% and 4.8% for 2016 and 2017…”
6.On the very same Sunday, another headline – ‘Fifteen finance companies in trouble: IMF’; “…the IMF revealed that out of the registered 46, 15 presently facing liquidity issues, with six at a high level of distress with non-performing loans ranging from 50 to 90%, according to the IMF in a recent staff report completed on 4 November 2016.”
7.On 29December, a banner headline read‘IMF calls for stronger financial sector supervision and regulation’ and added that IMF technical assistance on this subject “could be forthcoming”, since the recent rapid growth seen in credit has slightly lowered the Capital Adequacy Ratios (CARs) of banks and finance companies. This news supplemented by astonishingly detailed data published on CARs was attributed to IMF Mission Chief Jaewoo Lee from the same live teleconferencing event referred to earlier.
Preliminary, but significant issues for Sri Lanka, that arise are: In the writer’s long experience, this sort of IMF-public conduct is unprecedented; in-your-face, near ‘intimidation’ of a member government is unknown in Bretton Woods institutional history.
Do IMF staff have the absolute freedom to communicate directly with the public, sensitive data on the Sri Lankan economy given to the institution in confidence? Have these IMF staff judgements, which substantively differ from the press release of 9 December of the Executive Directors’ meeting dated 19 November, just three weeks earlier, been first conveyed to the highest levels of the Government?
Should the Sri Lankan authorities believe the Executive Directors’ “broad satisfaction” with economic progress or the IMF staff’s very critical, but needlessly overt, contrary public declarations? What is the governing IMF protocol on this issue of direct contacts with the press in beneficiary countries, which can be misused by detractors to criticise the policy actions of the Government?
Why is this level of minute detail on the economy, (such as decimal point changes in growth forecasts, which could– and may - turn out wrong, anyway) and politically sensitive policy actions, important for the public to know - from the IMF? Should publicity on such data not be at the Government’s sole discretion to release, rather than IMF’s primary and daily business to spew out?
Why is the IMF staff taking this adventurous path to brassy publicity, especially about adverse economic news derived from Government data, and especially judgements about political risk, forbidden ground for IMF/WB staff, if the IMF, an external agency, is only an economic advisor to the Government, which is its legitimate role?
The writer believes that it is the height of absurdity, for IMF staff to even presume to warn a respected member government in good standing, of the political risk of tax reforms, which the IMF itself is insisting on, in a specific time frame. Politics is definitely not the concern of any external financing agency!
It was entrenched policy at the Bretton Woods institutions that the sovereignty of member governments and confidentiality of sensitive government data should be respected unreservedly, in every single staff encounter with client governments.
This writer wishes to record here his vivid recollection that during the transformational and eventful Presidency of the World Bank by the late Robert S. McNamara (1968-1992), a Department Director was eased out for giving unauthorised publicity in a newspaper interview about the bank’s role (or absence of it) in a certain member country in Asia. This incident testifies to the strict preservation of country confidences entrusted to a financing institution of which the country is a respected member and shareholder. Staff used to know they flout this code of conduct at their own peril, because it ‘brings the institution into disrepute’, unless codes of conduct have radically changed for the worse, at the risk of the IMF losing still more clients.
These important protocol issues are raised in the context of the notorious public perception of the IMF as an interfering institution which financially burdens the middle and working classes, not only in Sri Lanka but also in other financially beleaguered countries. These highly public IMF news pronouncements corroborate the perception that it is the IMF that is causing cost of living increases, impacting large sections of the people, by compelling the authorities to adopt politically unpopular policies, not in the country’s best long-term interests.
Only the other day, a former senior Government official wrote: “These days not only foreign experts but also the IMF carry out clandestine operations to ensure that we will remain stuck in debt. The IMF told us to import freely, use foreign exchange freely and gave us loans…Aid now comes to our country to make us more indebted, so that our economy would never recover.” Such popular perceptions die hard, and are well justified by recent local events!
In the writer’s 30 yearsof experience at World Bank headquarters, direct staff contacts with the press were frowned upon by senior management of both agencies, since it could have the direct consequence of embarrassing the client Government politically, quite apart from presenting the awkward spectacle of an international organisation, invited as a guest to the country and given access to confidential data, appearing to override the accepted and unquestioned sovereignty of countries in which the IMF and World Bank operate, especially when such staff are critical of policy actions or lack thereof, directly speaking to the people who elected the Government, through the free media. Then the IMF and its staff (with their photographs in the newspapers) become the headlined main story, and not the travails of the country they have been invited to advise, which borders on outright neo-colonialism in its very worst manifestation.
Finally, it should be pointed out that protocol problems with the current IMF staff review missions started in September 2016 but with outright inaction by the authorities at both ends, have now visibly aggravated as seen from the above (IMF in Sri Lanka: ‘Bull in a China Shop’ syndrome – published on 7October2016).
Such IMF inaction at the top, on staff conduct and judgements, sometimes mildly critical but always indecisive, will be perpetuated by a passive, laid-back IMF Board of so-called ‘Executive Directors’, who have watched helplessly, after endorsing wrong staff economic forecasts and reckless judgements on Greece for seven years, and seen a western, OECD member country borrow billions of dollars, but go down the tubes, and into one catastrophe after another (‘Reliability of IMF Judgements and Program Efficacy,’ published on 3-4 August2016), evoking no comment from the IMF.
On a more substantive note, this progression of events also lays bare the stark divide between the Executive Board’s supportive and favourable views on Sri Lanka on 19 November 2016 and the IMF staff’s critical judgements barely three weeks later, which overtly erodes the credibility of the IMF as a responsible financial institution, charged with the highly-responsible duty of advising on policies affecting millions of people, which have made some countries come acropper like Argentina and Mexico in the past, and lately Greece, which is still reeling from adopting IMF prescriptions (‘Sri Lanka: Avoiding the Road to Greece,’published 13June2016). The financial plight of Greece today is paraphrased in the final paragraphs of this series of articles.
The substantive issues that also arise in relation to the course of extensive policy actions, explicitly or implicitly agreed by Sri Lanka with the IMF, by signing on to receive a bail-out, are: Why has the IMF not alerted Sri Lanka that its foreign debt level is unsustainable, especially given that commercial and non-concessionary borrowing now exceeds 70% of that debt? Government announcement of a proposed new borrowing of $ 1 billion in a ‘foreign currency term facility’ only aggravates the stormy horizon in prospect; while it was reported (without being contradicted), that the ‘Economic Council’ shot down an offer of $ 1.8 billion, in an interest-free loan from Iran for oil refinery expansion – for yet unexplained reasons?
Why has the IMF not advised the Government to seek debt rescheduling to ease unaffordable interest and loan amortisation payments, especially of the $ 8 billion debt to China? One possible explanation, advanced by some, is that the IMF is waiting for a worsening of Sri Lanka’s BOP crisis, by approving only a paltry commitment of funds, so that a second, larger bail-out, with even more onerous conditionality, will become inevitable.
At what cost to the people of this country has the Government agreed to carry out IMF diktats on consumer taxes in pursuance of an unproductive, neo-liberal set of economic philosophy and policy fundamentals, which have proved to be disastrous for some IMF-beneficiary, developing countries in the past, as already alluded to?
Will these agreed actions not implicitly result in the impoverishment of the country’s middle and working classes, with 40% of the people already living under the poverty line and a reported 25% youth unemployment, in the course of further enriching a national and global elite, among whom are multinational companies and foreign direct investors, whose role is being welcomed?; in this respect, the World Bank’s just approved IDA credit of $ 75 million, to upgrade welfare programs and to help improve the equity, efficiency and transparency of the social safety net, is to be applauded as addressing Sri Lanka’s highest priority issue. Likewise, ADB’s recent generous assistance to upgrade the power distribution system of the country is noteworthy.
Does not youth unemployment at that 25% level referred to, represent a ticking time bomb, even before IMF-dictated, increased VAT and higher cell phone charges, directly resulting in cost of living increases, affecting a broad cross-section of the population, kicked in on 1 November 2016?; finally – and mostimportantly – hasSri Lanka probed how other developing countries in East Asia Region adopted quite substantially different economic policies to those of the IMF and achieved more speedy and broad-based sustainable development to higher standards of living for the large mass of their people?
In the paragraphs that follow, it is proposed to present arguments for, and evidence of, this innovative strategy of the “Development State” that has proved much more effective than progress under IMF-dictated slow-paced, economic reform programs, and made those countries ‘miracle’ or tiger economies, which reached prosperity, in a much speedier time-frame, with equity for all – a first in development history.
Nationalism, and its fellow traveller protectionism, are sweeping across the Western world, ever since the global financial crisis of 2007-8, which started in the US, essentially on Wall Street, in a paroxysm of financial greed for quick enrichment, resulting in a financial apocalypse significantly not forecast by either the IMF’s or the World Bank’ phalanxes of Ph.D-qualified specialist economists!
Nationalism presents a major backlash against globalisation, and its far-reaching, underlying economic philosophy, which is the foundation on which the neo-liberal dogmas of the ‘Washington Consensus’, and obsolete IMF policy prescriptions applied to its clients like Sri Lanka, has been grounded and developed.
An important victim of this new protectionist wave is so-called liberalised trade, now translated into IMF-advised, preferential trade pacts, which Sri Lanka is currently negotiating with several economies, more industrialised and developed than Sri Lanka (about which, later essays will provide analyses), interpreted by knowledgeable critics to symbolise the victimisation by the globalised elite of the economic interests of the unsuspecting middle and working classes of developing countries, struggling to improve their living standards.
Following on this anti-globalisation tsunami, the current phenomenon is of 350 protectionist measures entered into recently by members of the Club of G-20 rich countries to safeguard their own productive enterprises from global competition, through changes in trade regulations and anti-dumping procedures; while the virtual collapse of Obama’s brainchild, the abortive Trans Pacific Partnership (TPP) and the impending emasculation of the North American Free Trade Agreement (NAFTA), operating since the Bill Clinton era in the 1990s, will collectively lead to a reinvigorated wave of serious new barriers to international business, trade and migration.
In addition, if Brexit is followed by UK’s withdrawal from the EU single market as expected – all these current developments will send a very negative signal to developing countries like Sri Lanka, whose politicians and bureaucrats are unable to visualise the tea leaves, meaning that even well-established free trade pacts are collapsing in the wake of the rising anti-globalisation wave, also unrecognised by the IMF, which is still urging preferential trade arrangements on an unsuspecting Sri Lanka.(See ‘Anti-Globalisation on the March, Free Trade Under Fire,’ The Economist, 2016, which recently convened an economic pow-wow in Hong Kong, which the Prime Minister also attended).
Listen to a perceptive local commentator wax eloquent in colourful prose: “Globalisation was the poster child of Imperialism; free trade, open markets, (free) capital movement, curbing wages and workers’ rights, eliminating tax on multinationals and removing currency restrictions. For decades, this was the IMF, Washington (Consensus) and (UK’s) Whitehall chorus, the refrain of learned economists, some of them Nobel Prize winners, now strangely deaf and dumb, and of course our very own J.R. and his mouthpieces (now in power?). Then what on earth went wrong? Unexpectedly, millions in the West were left out and left behind; globalisation did not work in the Appalachian coal mines, Detroit (in the US), industrial regions of France and in the north of UK, the sorcerer’s apprentice, capitalist globalisation, turned on its master, globalisation per se, and devoured it? Brexit, Trump and the rise of the European far right manifests this wrath, but none have the foggiest notion how to stop this slide…Globalisation has gone sour (except in Sri Lanka, thanks to the IMF)…Obama laments: ‘globalisation needs course correction’.”(Dr. Kumar David, ‘It’s Back to the Drawing Board for Globalisation,’ 27November 2016).
Then again, by the very same author: “The underlying concerns about the economic consequences of globalisation and accelerating technological change are understandable. We need to put this alongside the financial crash which brought home that a very few individuals in the financial sector accrue huge rewards and that the rest underwrite that success and pick up the bill when their greed goes astray. We are living in a world of widening, not diminishing, inequality, in which many people can see not just their standard of living, but their ability to earn a living disappearing. It is no wonder that they are searching for a new deal…the opposite of what we have been force-fed for decades…Events have verified that the working and lower-middle classes are in revolt…it is at one and the same time the expression of real suffering and a protest against real suffering…” (‘Confronting the Advance of New Populism,’ 25December 2016). Welcome to the consequences of IMF dogma! Several countries in East Asia have found the “new deal” and prospered from a different strategy (the next part will explain how).
(The writer, a member of the former C.C.S., was a professional at World Bank headquarters for three decades).
