IMF’s $ 2.5 billion boost and the way forward for Sri Lanka

Sri Lanka on Tuesday woke up to the good news of the International Monetary Fund( IMF) announcing the to-be approved US$ 2.5 billion (Rs. 287 billion) support to the country to shore up its foreign reserves, which has been at low levels due to the impact of the global crisis and domestic issues.
The IMF support, which is expected to be formally approved by its Executive Board on Friday, has been much awaited since the government made its request official in early 2009, and perhaps equally controversial both in the financial and political circles.
In fact, on January 19, the Central Bank denied reports that the country would be seeking an IMF bailout. However on March 4, eventually the Central Bank admitted that the Government has sought a Stand-by Arrangement from the IMF, in the range of 300 per cent of Sri Lanka’s current quota with the Fund, which amounts to approximately US$ 1,900 million. This request, Central Bank qualified nevertheless, was a response to an offer of the IMF to support Sri Lanka during the current global financial crisis. In its original announcement, the Central Bank did express hope that negotiations with IMF could be concluded by end March. As evident from this week’s IMF preliminary statement, the actual conclusion of negotiations took five months.
Despite the Government’s successful defeat of the 30-year terrorism unleashed by the LTTE, alleged human rights violations saw some of the Western countries, pressurising the IMF not to fund Sri Lanka. The delay was such that patience was waning within the Government, with some making statements that the country may not need IMF funding as Sri Lanka’s reserves, as well as pointing out that macro-economic fundamentals have improved in comparison to the situation when the first announcement was made. This was perhaps to suggest that Sri Lanka wasn’t willing to bow down to any undue pressure exerted on the IMF by anti-Lankan lobbies.
Nevertheless, the near five months wait for IMF announcement cannot be singularly attributed to the anti-Sri Lanka lobbying which the IMF had to come to terms with. The time taken could actually be part of the thorough pre-approval assessment the IMF undertakes before extending financial support. Given its own good governance practices and accountability, IMF needed to be independent and impartial. It could have been bit more efficient as well.
On the other hand, we must recognise the fact that Sri Lankan authorities too had their part to play in terms of sharing required information and agreeing as well as finding the political space to the proposed programme of the IMF. In the interest of both parties, an early finalisation of the negotiations would have been better.
The fact that the Government agreed to accept an enhanced amount, US$ 2.5 billion as opposed to the original US$ 1.9 billion, confirms that the Government needs funds, and that the IMF had more confidence in Sri Lanka to commit the extra funding.
Hence the agreement by the IMF to enhance the support to US$ 2.5 billion, is indeed a resounding vote of confidence for Sri Lanka in general, and the Government in particular. As Central Bank envisioned, such support would enhance the assistance from other development partners as well as significantly improve international investors’ confidence in Sri Lanka. The availability of an IMF facility for balance of payments support would help to supplement the Government’s efforts to stabilise the external sector performance of the country, and enable the country to face the times ahead with greater confidence and certainty.
Though the level of confidence among officials in terms of managing the immediate and short term challenges remain high, hence suggesting less reliance on IMF support, it would be unwise to be over confident.
Between March and now, the country’s external trade has been facing rough seas. In the first five months of this year, exports were down by 19%, while imports plunged by 38%. Remittances had increased by only 3%. The short term outlook for these key economic indicators isn’t very favourable.
The Government is also facing the challenge of improving its fiscal operations owing to dip in revenue and overruns in recurrent expenditure. Budget deficit is likely to be much higher than what was originally forecast at 6.5%.
Inflation has been declining, but interest rates haven’t fallen to the desired levels and would take much longer time. This means, private sector preference to borrow to finance new investments, or expand existing businesses, could be weak.
Demand for products and services in global and domestic markets is yet to rebound, while the income levels of people haven’t improved either. Many experts estimate the true recovery of the global economy will take place only in the latter half of next year. So the wait is longer and could be painful.
It is in this context, that though the major breakthrough has been achieved, Sri Lanka cannot sit relaxed. Indeed the IMF support is a big boost.
However, it is not the end but must be the means to a better end. The IMF support as well as the resultant positive sentiments across the world, should strengthen the country’s resolve to overcome current and temporary difficulties faster, and lay the platform to achieve the desired high socio-economic growth in the post-war opportunity.
We have often stressed the unfolding golden opportunity before the nation, and the need to seize it with collective might. The IMF’s preliminary statement on Tuesday did reinforce this.
“The end of the conflict provides Sri Lanka with a unique opportunity to undertake economic reform and reconstruction, which would be the key to laying the basis for higher economic growth in the years ahead,” it said.
To this end, the IMF welcomed the fact that the Government has formulated an ambitious programme aimed at restoring fiscal and external viability, and addressing the significant reconstruction needs of the conflict-affected areas.
The IMF staff has communicated its supports to this programme, specifically the Government’s goals of rebuilding reserves, reducing the fiscal deficit to a sustainable level, and strengthening the financial sector. It is also essential that the programme cushions the most vulnerable from the needed adjustment. IMF also expects its support programme will encourage Sri Lanka to work with the donor community, to ensure an adequate level of financing for the reconstruction effort, to lay the foundation for future growth.
Now that the IMF funding is literally in the kitty of the Treasury, Sri Lanka needs to get down to business to achieve desired income and reforms to rejuvenate the economy, to repay the debt in the future comfortably, and make its people prosperous as well.