Columns - The Sunday Times Economic Analysis

New minibrand economic diplomacy

By the Economist

We have witnessed some of the strangest exercises in diplomacy touching the economy of the country. First, it was British, second it was American. Miliband of Britain and Clinton of US attempted to use the IMF decision on lending to Sri Lanka as a tool to stop the war against the terrorists that has now been won. In the process their words have added a further dimension of uncertainty with respect to the impending IMF loan facility. Furthermore their conduct has cast aspersions on the IMF as a competent international financial institution.

The concern with the plight of the Sri Lankan citizens caught in the crossfire in the last few weeks was a matter of concern for everyone with an iota of humanity. The appeal to stop the fighting and the call for a ceasefire may have been a genuine expression of that concern. It was of course a concern the same countries have never shown in the past, when they themselves caused enormous harm to much larger numbers of civilians the world over, whether it was in the two World Wars or more recently in Iraq and Afghanistan. These double standards are well known. This is so evident that repeating it is not of much use. That is not the issue we raise here. What we are concerned here is a different but related issue of how the concerns of the civilians in the war spilled over to economic blackmail.

Miliband, the British Foreign Secretary and Hillary Clinton the US Secretary of State for Foreign Affairs said, in slightly different words, the IMF should not grant Sri Lanka the bailout facility of US 1.9 billion that was pending.

The one said there was no certainty it would be used properly, the other, the withholding should be used as a means of pressurizing Sri Lanka to stop the war. Both countries do have a clout in the IMF: the US far more than the UK. The US is the dominant partner in the IMF with the highest shareholding and voting strength of that body. The delay in the granting of the facility has created credibility that these countries have used their muscle to postpone the loan, even if in fact the reasons may be different.

These two ministers in charge of external affairs have in fact insulted the International Monetary Fund in many ways. First they have brought the IMF into disrepute by considering it as a politically motivated set up rather than a financial institution whose decision making is on economic and financial criteria that are the guidelines of the organisation.

They have implicitly brought down the prestige of the apex international financial organisation set up at Breton Woods after the Second World War to bring order into international financial conditions, and to assist countries in the kind of balance of payments difficulties that Sri Lanka finds itself in. If the facility of US$ 1.9 billion is not granted by the IMF, for whatever reason, the image of the IMF will surely be tarnished as a political tool of the big western nations. This, despite the possibility that the reasons for not granting the facility may perhaps be other legitimate financial and economic criteria.

The Central Bank of Sri Lanka has quite rightly pointed out some salient facts in response to the remarks of the British Foreign Secretary, David Miliband, with respect to the proposed IMF loan facility. In response to his statement where Miliband is supposed to have “raised doubts about whether Colombo could be trusted to use a US$ 1.9 billion loan from the IMF appropriately”, the Central Bank has pointed out “during the past 25 years, the IMF has granted nine loans to the Central Bank of Sri Lanka and the Bank has utilized all such IMF facilities very honourably in strict compliance with the terms of disbursement, and repaid such facilities without a single default. In fact, Sri Lanka has never delayed or defaulted on any loan, and consequently, has maintained an unblemished record of debt servicing.”

Furthermore, the Central Bank has also responded to Miliband’s remarks that the Government of Sri Lanka should be “able to show it will use any IMF money in a responsible and appropriate way”, and that he “does not think that’s yet the case”. As the Central Bank has quite rightly pointed out these remarks display a “lack of basic knowledge, since IMF facilities are made available only to monetary authorities/central banks for balance of payment support purposes, and hence the contention the government would utilize IMF money does not arise.” Nevertheless, one must point out that finance is fungible and the manner of government expenditure would have an effect on the external account and the balance of payments. In other words, government expenditure for whatever purpose would have an import content that would in turn have an effect on the balance of payments.

Similarly Hillary Rodham Clinton said the world was disappointed with Sri Lanka and wanted the government to stop fighting. She said the time was inappropriate for the IMF to grant the loan that was being processed. She said it "is not an appropriate time" to consider a massive International Monetary Fund loan for Sri Lanka. She is reported to have told the media: “We have also raised questions about the IMF loan at this time. We think it is not an appropriate time to consider that (loan) until there is a resolution of the conflict," The Clinton effort to stop the fighting raises fresh doubts about her motives as she was financed by the LTTE as a presidential candidate.

Her remarks too that wanted the IMF facility to be withheld as a means of influencing the Sri Lankan government to stop the war was an affront to the IMF as a responsible and competent international financial rather than a political tool in the hands of powerful countries, particularly the US. Governor Cabral has pointed out the IMF is a financial organisation guided by its own Board and expert staff that judges the granting of loans on the basis of financial criteria and not on political considerations. This is the expected behaviour of the IMF. Will it divert in this instance?

As the old saying goes, nothing succeeds like success. It is now very unlikely that the granting of the loan would be influenced by the governments of Britain and the US that have themselves pledged large sums of money for reconstruction effort. Now that the war is over and the reconstruction phase is to begin there is an added rationale for the IMF to disburse the loan swiftly. We can live in hope and expectation of such an outturn. Now Ms. Clinton might as well say that the time is appropriate for granting of the loan. That may restore her image to some extent as not being supportive of terrorism. Mr. Miliband can also make an about turn. Yes, nothing succeeds like success.

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