In today’s Business Times (see this page) we carry an article by a well-known economist putting forward an argument that the IMF’s Stand-by Arrangement (SBA) with Sri Lanka is not a vital need anymore as the country now has enough foreign reserves.
Dr T. L. Gunaruwan from the University of Colombo asks that with the sharp rise in reserves, as per Central Bank figures, is there a need to continue with the IMF facility as “these funds cannot be used for development purposes, and drawing from this facility will merely increase the foreign indebtedness of the country”?
His view comes in the backdrop of the government’s sudden announcement on Friday that it was delaying the budget for 2010 till July and planned to present another vote on account to meet funding requirements for the next few months, giving every reason for economists to infer that IMF or no IMF, spending is set to rise and budget deficits would be way off target.
Dr Gunaruwan, a former General Manager of the Railway Department, was a key member of the team that prepared the recent ruling party manifesto ‘Mahinda Chintana Forward Vision’ before the presidential elections. In that context, though independent in his thinking, he must be reflecting a widely-held view in government circles that its time to move out of the IMF targets-led package.
The argument makes sense since now that the budget is coming in ‘bits and pieces’, the next few tranches of the IMF loan is unlikely to come or get further delayed given that deficit targets would be hard to keep.
Central Bank Governor Ajith Nivard Cabraal was unavailable for comment on the delay in the budget this year and its impact on the IMF facility, which has been held up with the third tranche. IMF Country Representative Dr Koshy Mathai was also unavailable for comment.
The IMF postponed the third tranche earlier this year as the budget deficit target for 2009 reached 9.7%, overshooting the target of 7% as agreed between the IMF and the government.
Maintaining budget deficit targets to 5 % by 2011 from projected 7 % in 2009 is one of the conditions in the IMF package.
With the budget being further delayed this year, and spending already exceeding the 4-month (January-April 2010) Vote on Account, no way can Sri Lanka keep to these fiscal targets.
Thus it makes sense arguing out a case for a withdrawal from the IMF facility midway because in any case the disbursements would stop or face indefinite suspension because stipulated conditions (or terms) are not being kept.
Central Bank officials have also hinted in the past that with foreign reserves hitting record levels of $5 billion, the IMF facility is not a dire need.
But what are the negatives from a pullout of the IMF deal? Rising inflation due to unlimited spending; indiscipline in managing the economy; possible loss of confidence from foreign investors; possible pullout of foreign funds in bonds and treasury bills, and pressure on foreign reserves, according to economists. In recent weeks there has been an outflow of foreign funds from the stockmarket amidst huge profit-taking. This could increase in coming weeks.
Rising oil prices could also cause further strains on the reserve position and trigger inflation.
Oil prices have almost doubled to over $80 per barrel this month from $44 a year ago (April 2009), and any rise in these levels would force the Ceylon Petroleum Corporation to raise local fuel prices.
Apart from the need to prop up sagging foreign reserves last year, the IMF facility was seen as a vote of confidence on the Sri Lanka economy, and furthermore a positive signal to foreign investors.
Nationalist forces in the government have always frowned on the IMF deal saying its conditions are too harsh for countries like Sri Lanka, a misguided view because the conditions or targets are more beneficial to Sri Lanka – in maintaining disciplined spending – than to anyone else.
Whether the government maintains discipline in its spending without the IMF watching over its shoulder, only time can tell. In any event, large-scale funding on development projects was anyway going to happen.
The hope however is that the money (of the people) is used carefully, consciously and without haste and waste. If that happens, then President Mahinda Rajapaksa’s new administration would be admired for working in line with public expectations.