Better governance key facet of IMF-Govt. programme

The IMF assistance continues to stir up much debate and following its approval last week the Opposition and other critics have been more vocal. The US$ 2.6 billion 20-month Stand-By Arrangement is indeed landmark for many reasons.
Firstly it is the biggest concessionary assistance the country had received in one go though the funds would be disbursed in equal tranches of US$ 322 million. Especially in the aftermath of the successful crushing of terrorism unleashed by the LTTE for 30 years, the IMF support is certainly a significant vote of confidence on the country’s future prospects as well as the resolve to rebuild.
It must be emphasised that IMF funding is strictly to boost the country’s reserves and not given to the government to spend on development or other expenditure.
Like all IMF assistance, it is to support the Balance of Payments challenges that countries face due to either external or internal shocks. The original request was for US$ 1.9 billion or 300% of Lanka’s quota in the IMF. It was the government which exercised the option of enhancing the amount to US$ 2.6 billion or 400% of the quota whilst the maximum limit is 500%. As explained last week in our editorial, the higher amount, in fact reflects that there was a need though the concessionary rate of interest could be a further attraction.
The Central Bank did maintain that between the original request i.e. in March 2009 versus IMF approval i.e. July 24, the reserves and macro economic fundamentals had improved for the better. One factor cited was an increase in reserves by US$ 500 million, dip in inflation and downward trend in interest rates along with a relatively stable exchange rate. A positive re-rating of growth prospects following the end of war had also figured in the overall improved outlook. Nevertheless Sri Lanka wasn’t out of the woods, and impact of the external and internal shocks was to be felt rest of the year vis-à-vis the more favourable situation the country enjoyed prior to August 2008. In that context the IMF assistance does significantly enhance the comfort level for the country in terms of reserves as well as enabling the government to better manage its finances. If one leaves political rhetoric aside, the most important thing the IMF programme ensures, is better if not greater financial discipline within the government than what it was prior to extending such support. In that context the landmark Government-IMF deal concluded last week is highly welcomed. As part of securing IMF’s assistance, the Government’s economic reform and post-conflict reconstruction programme includes the following key elements:
Fiscal policy:  The programme aims at reducing the central government budget deficit to 5 percent of GDP by 2011, from a target of 7 percent of GDP this year, in line with the Fiscal Responsibility Act. Revenue increasing measures include broadening the tax base, reducing tax exemptions and improving enforcement, which are coupled with measures to rationalise expenditures.  Cuts in military and other expenditures will help make room for post-conflict reconstruction and relief spendings.
Exchange rate and monetary policy: The programme envisions strengthening the country’s international reserve position and restoring external viability.  Allowing greater exchange rate flexibility is also needed to facilitate external adjustment and ensure export competitiveness.
Social protection: With 15 percent of the population living below the poverty line and a large number of people in the North and East of the country displaced by the conflict, the programme envisions protecting expenditures on social transfers to the country’s most vulnerable.  Spending on post-conflict humanitarian assistance will be also secured through savings from spending cuts and external financing and grants from multilateral institutions and the donor community.
Financial system: To build confidence in the local financial system, the programme includes measures to strengthen the banking system by improving the current regulatory framework and enhancing bank supervision. This suggests that the government has committed to better financial discipline. The Central Bank also expressed confidence that the government would deliver, thereby achieve, targets set.
For President Mahinda Rajapaksa to resort to the biggest ever financial support from the multilateral financial agency, he must have well assessed risks and rewards as well as the challenges. From a civil society perspective, the IMF deal will make the government more accountable apart from instilling much needed financial discipline. This means better governance could be expected though the road ahead would be challenging.
Ever since the Fiscal Responsibility Act was introduced in the early 2000, the Budget deficit target of 5% of GDP has been elusive for various reasons. This has made skeptics to rush to conclusions that the current government would miss the mark as well. However as of now, the Mahinda Rajapaksa administration must be given the benefit of the doubt singularly because it defied the odds and silenced critics by destroying perhaps the world’s most well organised terrorist organisation – the LTTE that created havoc for 30 years. If military leadership, muscle, intelligence, acumen and valour, made the end of three-decade old terrorism a reality, then the country will need a concerted effort by all especially politicians, the public and private sector to achieve stronger socio-economic growth. In that context the IMF-Government program is an excellent first step in what would be a challenging way ahead.