Sri Lanka is vulnerable rates :IMF

Whilst Central Bank appears to have finally woken up from its alleged “Alice in the Wonderland” mindset, Sri Lanka has been listed by the IMF among countries which are vulnerable by the deepening global economic crisis.

The assessment is contained in the IMF’s latest study on low income countries.

Whilst the Government has finally agreed to seek IMF assistance to the tune of US$ 2 billion, the multilateral donor in its study has found that atleast US$ 25 billion in urgent concessional financing will be needed to vulnerable countries to come out of the crisis.

The IMF study titled “The Implications of the Global Financial Crisis for Low-Income Countries” warned that without action, sharp rise in poverty and increased political instability was inevitable and more financial support is needed to help countries preserve priority spending.

“The majority of low-income countries will find it difficult to preserve priority expenditures that protect the vulnerable groups without increased external assistance,” said Hugh Bredenkamp, one of the study’s authors. “For those countries, it’s particularly important that the donors scale up aid.”

In a posting in an IMF survey online on how the crisis has affected Sri Lanka along with another country described as “frontier emerging markets” several observations had been posed.

In his response, Bredenkamp noted that “Sri Lanka (and Ghana) are good examples of the relatively few low-income countries that, prior to the crisis, had begun to get access to international financial markets to help finance their budgets. They were both hit as the markets essentially shut down. Ghana had plans to issue a big euro bond last autumn, but had to put them on hold, and Sri Lanka has seen the spreads on its international borrowing rise to essentially prohibitive levels. At the same time, these countries have seen foreign investors exiting from their domestic bond markets. So those two avenues for financing budgets are now drying up.”

It was pointed out that these frontier emerging market economies have also suffered from some of the same effects as other, less advanced low-income countries and the frontier emerging markets have suffered from a mixture of the more advanced kinds of shocks and the more traditional forms.

Whilst the Government’s decision to seek IMF bailout has been welcomed some experts have faulted with the Central Bank’s earlier strategy of painting a rosy picture of the economy and its prospects. Only a month back that the Bank said that it doesn’t need IMF assistance both financial and technical since the economy was being well managed midst global shocks.

In a statement dated February 19, the Bank among other things said: “The Central Bank is confident that above measures will help build up official reserves to a substantial level and therefore the claims made by certain persons that there would be a significant devaluation or that Sri Lanka will soon apply for an IMF bailout are erroneous and misleading.”

Though the Government has said that it was the IMF which offered help hence it was accepted, economists have said that had the Government been more pragmatic and admitted there was a real crisis, the situation could have been better managed because the Central Bank spent scarce foreign reserves (estimated to be over US$ 600 million) to defend the rupee in what eventually appeared to be a futile exercise.

However there were also some analysts who noted that poor countries such as Sri Lanka want to take donor led short cuts.

“They wish to postpone the hard work of building insitutions, policy development capacity and an understandign and ownership of reform. Well those things need to be done. until they are, it will only be cycle of poverty and borrowing. There are no short cuts,” they emphasised.

The overall gloomy picture for the world economy was best summarised by the World Bank. It said the global economy will shrink for the first time this year since the Second World War.

The bank’s forecast is gloomier than other estimates, which still foresee some growth.
By the middle of 2009, industrial output could be as much as 15 per cent lower than 2008, while trade may record the biggest decline in 80 years, it said.

Developing countries face a financing shortfall of up to $700 billion (BD264 billion) this year, the bank added.