Columns - Political Column

The battle for the IMF loan

  • Double dealing and double talk amidst the jublilation
  • As elections loom, moves to muzzle opposition and free media
By Our Political Editor

The jubilation in the dovecotes of power is reminiscent of the events just two months ago and may even grow.

Like the military defeat of Tiger guerrillas, the news that the International Monetary Fund (IMF) has extended US $ 2.5 billion dollars under a twenty month long Stand-By Arrangement, swelled their hearts and lit their minds. The decision by the board of management came at a meeting in Washington on Friday. Some of the world’s leading nations – The United States, Britain, Germany and France – abstained at the voting. The move underscored not only the official positions of those Governments but also laid bare the reality of strained relations with Colombo.

Co-inciding with this move by the West, was the official announcement by the Swedish government that it was closing down its embassy in Colombo. It put ‘cost cutting’ as the official reason, but for one of the world’s richer countries that seemed ironic. Un-officially, the government’s extra-ordinary decision to deny Swedish Foreign Minister Carl Biltd a visa to join two other Foreign Ministers Richard Kouchner (France) and David Miliband (Britain) on an official visit to Sri Lanka in the immediate aftermath of the crushing of the LTTE cannot be ruled out as a factor that was considered by Stockholm when the decision to close down the Colombo embassy was taken.

“The authorities have put in place revenue-enhancing measures and intend to introduce reforms to reduce tax exemptions and broaden the tax base beginning in the 2010 budget. This, together with savings on military spending and possible concessional donor financing, should help finance the considerable reconstruction spending needs,” the IMF’s Deputy Managing Director and acting Chairman Takatoshoi Koto, told the Board members. This would naturally lead to measures to curtail Government expenditure, enhance revenue, bring down the GDP ratio, reduce budget deficit and inflation.

The good news from the IMF is notwithstanding the latest assertions by the oft-quoted Central Bank Governor Ajith Nivard Cabral. It was just two weeks ago, he declared, in what seemed the moral of the wellknown nursery tale of sour grapes, that “things are looking good after the war. The urgency for an IMF loan is not there anymore.” That was in contrast to his previous claims that the IMF facility was almost on hand. Unlike that tale, the grapes, as the story goes, were not sour. The IMF agreed to the loan.

A few days ago he was on this wall poster now he is in the pyre; a poster showing Galle Muncipal Council Opposition Leader Dushyantha Seneviratne who was slain on Wednesday. This popular politician was tipped to be the leading UNP candidate at the upcoming Southern Provincial Council elections.

To the average Sri Lankan, the Stand-By Arrangement would mean little in direct terms. There would be neither salary increases nor other monetary benefits. The dichotomy, for the common person, is indeed paradoxical. If the IMF turned down the Sri Lankan request, the people would have had to pay more for some essentials, especially imports, and make do without others. That is with the inevitability of import and other restrictions. An economic collapse would have loomed large for Sri Lanka.

Now that the IMF has agreed to the Government request, made in March this year, it may still mean paying more for some essentials and making do without others. What remains is how the loan would evolve itself. The reason – the terms and conditions the Government of Sri Lanka has agreed to conform and comply for receiving the standby facility. It is these terms and conditions that are embodied in the Letter of Intent (LoI) given to the IMF.

Deputy Finance Minister Ranjith Siyambalapitiya signed the LoI besides Cabral. However, whether he did so as acting Minister of Finance when President Mahinda Rajapaksa was away in Egypt attending the Non Aligned Nations conference. Rajapaksa has repeatedly insisted he would not sign any LoI that carried conditions. The IMF requires a country’s Finance Minister no less as well as the Governor of the Central Bank be signatories to the LoI. That is a sine-qua-non; one can call it one of the IMF conditions, if you like. Siyambalapitiya had to do the honours.

In terms of IMF policy, with the consent of the Government requesting the facility, the LoI is posted on the IMF’s official web site. This is for purposes of both transparency and accountability. The LoI was released to the media last evening. It is likely the LoI will also be tabled in Parliament when it sits next on August 6. An official statement is also likely to be made.

The other Deputy Minister of Finance, Sarath Amunugama was cautious on Thursday in not disclosing any terms but was only emphatic that the Government would not curtail welfare programmes. The bitter pill for Sri Lankans is not welfare programmes alone. Last month, fuel prices were increased. In the wake of an impending IMF loan, Pakistan also carried out a similar increase in the same week. Government officials tried to explain it was due to a rise in market prices. However, crude prices and the margins of increase did not appear a convincing argument. Only last week, the price of flour-based products was increased in Sri Lanka after the government decided to withdraw a rebate provided to flour importers. The price of bread went up by Rs. 1 as a result.

Vast amounts of money printed and meant for circulation were withdrawn. Reports in the media said orders for military hardware worth US $ 200 million had been cancelled. It was to send the message to the IMF and the donor community that military spending is pruned. Several other fiscal measures remain unpublicised. As is customary in Sri Lankan politics during the grant of IMF or World Bank loans, the Opposition demands details of the conditions under which the $ 2.5 billion is obtained. There have often been the customary accusations of the country being mortgaged.

On Thursday, frontline MPs from the main Opposition United National Party (UNP) urged the Government to provide details of the LoI. Yet, UNP Leader Ranil Wickremasinghe appeared to endorse the Government’s move. He said his party had called upon the Government to turn to the IMF instead of raising loans from private foreign commercial banks at high interest rates, something the Government did to show off that the country’s borrowing capability was good and it could do without the IMF loan.

The reason for the Government to ask the IMF for a loan was to tide over the Government’s first balance of payments crisis in four years. Then, the country’s foreign reserves plunged to six week’s worth of imports. Just last week, Governor Cabral told Agence France Presse (AFP) “we have more than 1.6 billion dollars in reserves, enough to pay for over two months of imports. And the figures are steadily climbing.” He said inflows had come from higher remittances, donor funds and foreign investors buying rupee denominated Treasury bills and bonds. The Central Bank had also raised cash by selling dollar debt.

The Executive Board of the IMF on Friday approved “an amount equivalent to SRD (Special Drawing Rights) 1.65 billion or around US $ 2.5 billion. Under the 20 month Stand-By Arrangement, Sri Lanka will be able to draw immediately about US $ 313 million. Just last week, IMF Managing Director Dominique Strauss- Kahn, said “the strong measures that the authorities are taking under the programme justify the exceptional level of access to Fund resources – equivalent to 400 per cent of Sri Lanka’s quota in the IMF.”

Strauss Khan noted, “Persistently high budget deficits have forced the government to rely on short-term financing from international markets. The global financial shock resulted in a sudden stop to these financing, capital outflows, and a significant loss of Sri Lankas international reserves. Despite recent capital inflows, international reserves remain at low levels.” Herein lay the crux of the problem.

As Managing Director Strauss-Kahn noted international reserves, remaining at “low levels” is what caused serious concern for the Government. Cabral had one eye on the bourse and another on the Sri Lankan public when he bluntly deflected the issue periodically by saying that the loan was almost at hand. He knew the reality was different. The bourse was not bullish and the public, particularly the discerning, were sceptical about the future course of the country’s economy. Famously, or infamously, he told a seminar of economists not to take everything he says publicly, seriously. That gave rise to concerns over the investment climate and fears of a gloomy environment for growth of business. Behind the scenes, it was a different story. A coterie of Ministers, Sri Lankan envoys and officials were busy lobbying through powerful channels to persuade the IMF to yield. They harped on the basic tenet that the IMF, of which Sri Lanka is a shareholder, was an organisation that had its own guidelines (and not political considerations) in extending facilities to member countries. One of the main criteria was the IMF’s terms and conditions aimed at ensuring viability.

It is during this period that Minister Amunugama accused the United States of trying to stifle the loan. This drew a response from Washington. In the recent weeks, some Ministers who were doing the cocktail circuit even accused neighbouring India of doing so. However, Indian High Commission officials scoffed at the accusations, and to the contrary there were unconfirmed reports that India had, in fact, intervened in getting the loan through.

There was cautious optimism in sections of the financial circles over the IMF loan. According to a Reuter report jointly datelined Hong Kong and Colombo, a Fitch ratings official said on Tuesday it was a “positive development but by itself would not be sufficient reason to raise the country’s rating outlook.” The leading firm had cut Sri Lankas outlook on its B-plus rating to negative from stable in February, this year, over concerns about Sri Lankas external financial position and a steep decline in foreign exchange reserves. According to Fitch, it had dropped 63 per cent to just $ 1.27 billion in the seven months to the end of March.

Reuters quoted James McCormack, head of Asia-Pacific sovereign ratings as saying “I don’t think the IMF agreement will cause us to revise the outlook.” He said, “What we need now is to review the Government’s commitments under the IMF programme and get a sense of that ourselves and see where it leads the rating.” He said that besides the IMF facility adding to foreign exchange reserves, other likely benefits would be restoring Sri Lankas financial viability, external viability and strengthening the financial sector. Fitch would look at developments more thoroughly before deciding if the outlook can go back to stable. Fitch would do that next month after discussions with the Government, he added.

A commentary in the London Times newspaper notes, among other matters, that, “IMF loans are granted on the basis of economic responsibility, not on moral approval. A further delay might drive Colombo closer to China, which has been the Government’s main supporter and supplied the arms that gave the army its vital military advantage.

China is seeking greater use of Sri Lankan ports for its navy, especially for the submarine force that Beijing is expanding in the Indian Ocean. A tighter alliance would certainly be viewed with suspicion in India and by many Western strategists.

“The West’s condemnation of Colombos conduct in the war has been taken by many in the Tamil disapora as an endorsement of their struggle for an end to Sinhalese rule. That is a dangerous misreading of the Western position. The Liberation Tigers of Tamil Eelam was a brutal terrorist organisation, led by a blinkered zealot who brought tragedy upon his people.

“Alarmingly, the Tigers are now attempting to set up a successor organisation in exile, with no attempt to distance itself from the Tigers’ aims or tactics and which is headed by a senior former Tamil Tiger fighter. The Tigers were comprehensively routed, and the diaspora should instead seek democratic ways to improve the lot of their kinsmen in Sri Lanka. A renewal of the armed struggle would give hardliners an excuse to delay reconciliation. That would be a tragedy for all Sri Lankans. There is a case for the loan in the circumstances but it certainly must not be construed as approval of the behaviour of the Sri Lankan Government….”

IMF Managing Director Strauss-Kahn noted that the end of the conflict “was 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.” To this end, he noted, “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.”

Tigers try to roar again

Those ‘words of wisdom’ from the IMF came in a week when a coterie of people, remnants of Tiger guerrillas headed by their one time weapons procurer, Kumaran Pathmanathan issued a statement on the letter-head of the Liberation Tigers of Tamil Eelam (LTTE). It said Pathmanathan has been appointed to succeed late Velupillai Prabhakaran as the new LTTE leader and claimed a “restructure process” was under way. The two page statement, signed by two previously unknown persons – Suresh (Amuthan) and Ram – boasts they have set up a “head office” to “take our struggle vigorously forward.”

Pathmanathan followed up the statement with an interview to Singapore based Channel News Asia where he claimed to remake the group into a “a peaceful separatist movement.”

It is clear that a so-called Committee formed by remnants of Tiger guerrillas are trying to keep the movement, dead in Sri Lanka and alive abroad. The broader objective appears to be two fold – to focus the attention of the Tamil diaspora and ensure the funding continues.

There is no danger, either militarily or otherwise, from their activities in Sri Lanka. However, they are gaining propaganda mileage. The statement made it to the world’s media. There is only one answer – a concerted effort by the Government to pressure Malaysia to heed the Interpol red notice and hand Pathmanathan over. Interpol has listed him as a most wanted man. However, Pathmanathan is not alone there. He had gone with millions of dollars sufficient to buy himself the protection of influential people in that country which has a sizeable population of Tamil origin.

Attacks on opposition and media

Back home, election fever has begun to rev up. While the IMF loan may have eased the Government’s anxiety about its foreign exchange reserves, it knows that the economy is what is going to count in the run up for the polls.

President Rajapaksa himself is well aware of the pitfalls ahead. He knows that the Sri Lankan voter is fickle minded, is prone to emotion and votes with the stomach most of the time. That is why he reminded a group of foreign correspondents recently that the great Winston Churchill won the war for Britain, but lost the election.

In the past fortnight or so, the Government has moved to neutralize three of the more vociferous Opposition MPs – Ravi Karunanayake by slapping foreign exchange charges against him in the High Court, and had the Criminal Investigations Department (CID) record the statements of Mangala Samaraweera and Ranga Bandara. The three of them spearhead the Opposition criticism of the Government. Samaraweera’s questioning by the CID comes only a week after he sent out a 16 page letter to SLFP MPs and supporters making scathing accusations against the Rajapaksa leadership of that party.

If that was not bad enough, in Galle, a young Opposition UNP politician, Dushantha Seneviratne was shot dead as he was taking his children to school. The 40 year old popular Opposition Leader of the Galle Municipal Council was set to contest an impending Southern Provincial Council election, and may have even been a candidate for the general elections early next year.

It seems, almost as if an eerie pattern is emerging in neutralizing the Opposition, or whoever is popular or talks too much. This is extending to the Media as well, with moves afoot to re-activate the Press Council Act.

In Parliament there was a mighty row when Wickremesinghe raised the issue and the non-cabinet Mass Media Minister Lakshman Yapa Abeywardene, a UNP cross-over defended the Government, alone in the House.

The Minister presented an absurd argument when he said that one of the reasons for re-activating the Press Council – which has powers to send journalists to jail, was because there were 20 permanent staff members who were getting paid for doing no work. But what created a rumpus was the fact that the Minister was saying that the Government was only implementing a COPE (Committee on Public Enterprises) decision to re-activate the Press Council.

Both Wickremesinghe and UNP MP Dayasiri Jayasekera who was in that parliamentary committee contested such a move to implement a COPE report without going through Parliament. There had been 17 Opposition MPs in COPE, but according to the minutes Jayasekera was the solitary Opposition MP who sat among a total of just 5 MPs when the matter had been discussed last December under the chairmanship of Minister John Seneviratne.

During that meeting, Mass Media Ministry secretary A. Dissanayake had said media organisations were against any Press Council because there already existed a voluntary self-regulatory mechanism in the Press Complaints Commission.

The Mass Media Minister told the House on Thursday the COPE meeting comprising all the members of the Opposition had agreed to re-activate the Press Council and all that the Ministry was doing was carrying out that decision of COPE. Now, the Opposition says it would take action against the Minister for misleading the House and take up the entire issue under Parliament’s Standing Orders for the Ministry by-passing the Legislature.

Taken together, the pattern indicates a gradual muzzling of both, the vocal elements in the Opposition and the muzzling of the Media as the road map for the upcoming elections, both Parliamentary and Presidential tend to take shape.

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