By
C.A.Chandraprema

Last week, SL sought support from the IMF which it did not get, and this has provided an opportunity for the opposition to charge that the SL economy is on the back foot.

In the meantime, minister Wimal Weerawansa started publicly attacking the Treasury Secretary as an ‘economic assassin’ one of the charges being that PBJ was masquerading as the ‘god of loans’ and misleading the government into making wrong economic decisions. Among the matters raised by Wimal was the government’s unsuccessful bid to recruit 50,000 unemployed youth and graduates into the government service.

All this came in the context where it was PBJ who had first announced that the government was seeking budgetary support from the IMF some weeks ago. The impression created by what was being said on the public platform was that PBJ had encouraged the recruitment of vast numbers into the public service on the assurance that the IMF would give SL the needed budgetary support and now that the IMF had turned down SL’s application on the grounds that this country is ineligible for such support, the whole country is now a sinking ship.

Opposition MP Harin Fernando sees Wimal’s attacks on PBJ as a case of the rats abandoning a sinking ship. After having first sought budgetary support from the IMF, the government later made the announcement that they will not be pursuing a fresh support facility.

Opposition politicians alleged that the government had been turned down by the IMF and were now trying to put a positive spin on it by saying that they had decided not to pursue a fresh support facility from the IMF because they did not need it. If IMF support was not needed, why was it applied for is the question in the minds of those who had been reading the newspaper reports on the subject. By the end of the week, some newspapers were even reporting that stocks were falling after the International Monetary Fund warned of slower growth, high inflation, and lower tax revenue.

About seven months ago, when the IMF issued its last Country Report on Sri Lanka in July 2012, they were almost effusive about the prospects of this country. The main risk factor they mentioned with regard to Sri Lanka was the slowdown of the economies of Europe and America which together absorb about 60% of Sri Lanka’s exports.

This however is a matter outside the Sri Lankan economy and something that will impact upon all exporting countries and not just Sri Lanka. The second risk was that of inflation, however this too they acknowledged would be due to the depreciation of the rupee and escalating energy prices. But both these measures were recommended by the IMF itself – allowing the rupee to float and increasing electricity and fuel costs to reflect market trends.

The third risk they saw was that of lower government revenue but this too was ascribed to lower imports and therefore lower import duty revenues. (It was the IMF itself which had recommended curtailing imports to reduce the balance of payments deficit.)

The IMF also warned that cutting expenditure to reduce the budget deficit could further dampen the growth of the economy. Thus seven months ago, whatever risks the IMF saw in Sri Lanka was either related to outside factors over which Sri Lanka had no control or were consequences emanating from decisions that had to be taken anyway to right the economy.

Other than these inevitable factors, the IMF painted a picture of a well managed economy. No country could have earned higher encomiums from the IMF in the present world conditions. They commended the credit ceiling that had been imposed on banks which had reduced borrowing and thereby contributed to reducing both inflation as well as imports.

The debt dynamics were deemed to be sustainable and the GDP/public debt ratio which had declined to 78% at the end of 2011, was expected to further decline in the long term even though depreciation of the rupee could bump it up in the short term. Many people will be surprised to learn that the public debt to GDP ratio has been steadily declining during the Rajapaksa years despite the war, and had reached its lowest point in 2011 after having reached a high of over 100% during President Chandrika Kumaratunga’s time.

One would think that a wrenching war like what we experienced would have sent public debt to GDP in the opposite direction. In the USA one of the main reasons for their public debt to GDP ratio to be over 101% is because of the wars they were embroiled in. By not having a public debt ratio over 100%, after having fought a war that the whole world is still talking about, SL is already an economic miracle of sorts. So it is hardly surprising that the IMF was so effusive in their praise of Sri Lanka seven months ago.

The IMF stated that “the (Sri Lankan) authorities deserve to be commended” for taking bold and decisive policy measures to arrest the foreign exchange reserve loss by curtailing exports, and allowing the rupee to float and stated that the main challenge now is to build on these policy achievements while coping with an increasingly uncertain global outlook. The IMF pointed out that “the transition to a flexible exchange rate regime and the winding down of foreign exchange market intervention has been a major achievement, and needs to be sustained.

Higher interest rates and the exchange rate depreciation have contributed to reducing the balance of payments deficit. Hence international reserves are projected to rise. Given the risks emanating from the global environment, the IMF encouraged continued efforts to build reserves while maintaining exchange rate flexibility.

The IMF also observed that the authorities’ commitment to meet the 2012 budget deficit target of about 6% of GDP is commendable, particularly given the weakening revenue and growth outlook and higher interest expenses. The target is achievable given the authorities’ track record of prudent expenditure control. However, decisive improvements in revenue collection are needed to sustain increased infrastructure investment.

The Letter of Intent sent to the IMF by Geethanjana Gunawardena – Deputy Minister of Finance and Planning and Ajith Nivard Cabraal, the Governor of the Central Bank on the 5th July 2012 made the following observations about how the Sri Lankan economy was managed over the past few years.

* Since the end of the conflict in 2009, the Sri Lankan economy has recorded undeniable success. Growth averaged over 8 percent in 2010 and 2011.

* inflation was brought down to the single digits and kept there for the longest period in our modern economic history.

* The budget deficit was steadily reduced.

* But as the economy grew, so too did imports, fuelled by rapid credit growth.

* Despite the strong performance of exports and remittances, the balance of payments deficit widened sharply last year, putting pressure on our foreign exchange reserves.

* SL adopted a bold package of measures to contain the deficit which included allowing the foreign exchange rate to float, increasing interest rates to curtail borrowing, and imposing a credit ceiling on banks.

* Reducing the losses of the CEB and CPC by increasing fuel and electricity prices.

* The budget deficit for 2012 will be kept at 6.2 percent of GDP through expenditure control and improved revenue collection.

Even P.Chidambaram, the Finance Minister of India who led the South Asian delegation to the IMF Financial Committee meeting in Tokyo in October last year, was effusive about Sri Lanka’s prospects. Having first emphasised what was on everyone’s minds, the uncertainties of the global economy, he made the following about the Sri Lankan economy:

* The Sri Lankan economy grew by 7.1 per cent in the first half of 2012 following two years of robust growth of over 8 per cent.

* The moderation in the growth rate was due to a combination of global and domestic factors. The weakened global economy adversely affected the export demand, while on the domestic front, policy measures to address high credit growth reduced the domestic demand.

* Inflation, which remained at single digit levels for over three years from 2009, gradually edged up during the year due to the upward adjustment of several administratively determined prices, including oil, currency depreciation and supply disruptions due to the drought.

* The Central Bank raised interest rates while directing banks to limit their lending growth.

* The government is committed to maintaining the budget deficit at 6.2 per cent of GDP in 2012 compared with 6.9 per cent in 2011.

* The trade deficit was reduced by curtailing non-essential imports.

* Increased receipts from workers’ remittances and higher earnings from tourism led to a significant improvement in the current account.

If this was the case, then what went wrong? Why did the IMF turn down SL’s request for budgetary support? UNP parliamentarian and economist, Dr Harsha de Silva said that the IMF does not, except under exceptional circumstances, offer budgetary support and that the purpose of the IMF is to help countries that face balance of payments problems. He states that in 2009, the IMF gave SL $2.6 billion to help us tide over balance of payments problems.

Dr de Silva says that when in January this year P.B.Jayasundara called a press conference, he had announced that he is looking for budgetary support. De Silva says that it is not really the money itself that the government was after but the credibility that comes with having an ongoing programme with the IMF. This acts as an assurance for the market of fiscal and monetary discipline.

When the IMF says something good about a country, that improves the credibility of that country in the international commercial space. And now without a programme with the IMF, the cost of borrowing is going to be more because that credibility is not there. When asked why they applied for budgetary support, a top government official said that they were looking for cheap credit from the IMF. So it appears that nothing untoward has really happened by the IMF turning down SL’s bid to obtain cheap credit. COURTESY:SUNDAY ISLAND