After months of political wrangling, verbal exchanges between the US and Sri Lanka and an anxious wait by administrators, the Central Bank is finally getting the IMF standby facility (loan) of $2.5 billion.
It was due to be approved by the fund’s Executive Board on Friday (July 24) in Washington which is a formality.
The loan request has been dogged by controversy after the United States and some of its western allies brought politics via human rights issues into the framework and said that the government must be made accountable for alleged human rights violations during the last stages of the battle with the LTTE. The delay in approval of the loan, applied for in end February, was clearly due to international pressure from the US and others.
Central Bank officials and economists expressed concern that a loan was being bogged down in politics rather than economic fundamentals which is against all rules and accepted IMF principles and norms.
Despite CB pronouncements that negotiations had been completed, the Fund sent a third mission for further discussions and it was after this that agreement was reached with the government on the $2.5 billion facility. The CB’s request was originally for $1.9 billion but subsequently increased the amount sought, taking into account post-war considerations in balance of payments support.
The CB strenuously – at the initial stages – denied our reports that the Bank was seeking IMF intervention to overcome a foreign exchange crisis.
The Sunday Times in a report on March 8 said, ”on January 18, 2009 that economists and exporters were urging the government to either devalue the rupee or seek a bailout package from the IMF to avoid a foreign exchange crisis. The following day after the Sunday Times lead story, the CB Governor Ajith Nivard Cabraal and other CB officials were quoted in several media reports saying there was no need for devaluation or the support of the IMF. In late February 2009, the CB announced that it was seeking a US$1.9 billion loan from the IMF.”
The return of the IMF is ironical for an administration which virtually chased away the Fund saying there was no need for money with strings attached. The IMF closed its office in January 2007 saying it was part of a restructuring exercise and also because there was no lending programme with Sri Lanka. But it was a well-known ‘secret’ that the government, under pressure from its coalition parties – JVP and JHU -, didn’t want aid with conditions like cutting welfare measures, reducing the budget deficit and public expenditure particularly the size of the public sector.
Questions are being raised by the opposition over tough conditions set out in the agreement reached by the government and the IMF. That would be known only if the Letter of Intent (LoI) is made public which the Central Bank Governor Ajith Nivard Cabraal has promised to do. He said the LoI would be released at a press conference on Monday to announce the IMF facility.
Tough conditions as in previous cases are very unlikely given that the IMF has come under severe pressure in recent times over conditionalities – an issue that has figured prominently in many political and economic summits attended by world leaders grappling for solutions to tackle the global economic and financial crises.
Fund Managing Director Dominique Strauss-Kahn on Monday said 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 supports this program, 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 cushion the most vulnerable from the needed adjustment,” he said, in a clear message that the Fund would ensure that the government keeps to its targets – otherwise instalments could get delayed.
The first instalment of $313 million was due on Friday while the rest will come in seven instalments over a 20-month period.
Economist Muttukrishna Sarvananthan says that although Sri Lanka has an impeccable track record on repayment of bilateral and multilateral loans on time, it has an abysmal record of fulfilling IMF’s fiscal and monetary policy recommendations. “Last time in 2001, the standby credit facility was discontinued after the disbursement of the first tranche primarily due to non-fulfillment of the agreed policy reforms and failure to attain the set targets,” he said.
There is speculation that India persuaded the US and others to support Colombo’s request and withdraw any reservations, and in return Colombo was to agree to India’s contention that a political settlement must be a credible one for the Tamils.
When President Mahinda Rajapaksa met Indian Prime Minister Manmohan Singh on the sidelines of the Non Aligned Summit, the latter was quick to praise the President as one who could bring peace to the country.
The IMF facility will boost international confidence and see renewed interest by foreign investors, needed particularly at a time when Sri Lanka recovers from the effects of a devastating war that turned the clock back on progress and sent thousands of skilled residents overseas.