For many years remittances from migrant workers set to reach $4 billion in 2010 (final figures are not as yet) has provided the lifeline Sri Lanka needs to fund its import bill plus pay off foreign debt.
Other key exports like garments, industrial products and tea are also important foreign exchange earners for Sri Lanka.
However since July 2009, Sri Lanka has also had to rely on the IMF (International Monetary Fund) for support to sagging foreign exchange reserves – at that time – when the world economy and finances was in dire straits. Foreigners (both individuals and organisations) had pulled out millions of dollars worth of Central Bank bonds following the financial crash and the foreign exchange cupboard was bare.
After months of negotiation between Sri Lanka and the IMF, sometimes stalled by concernsfrom the US and other western nations over human rights issues, the fund finally approved a $2.5 billion Standby Arrangement (SBA loan) and so far $1.5 billion has been disbursed including $216.6 million which came in on Thursday as the sixth instalment.
While Sri Lanka was slugging it out with the West over human rights issues, it was India which came to the country’s rescue after the approval of the IMF facility seemed in imminent danger of being lost. New Delhi persuaded the US to ‘go easy’ on its opposition.
In the same way, China has been a strong supporter of Sri Lanka in the UN on human rights-related issues. Both countries, Sri Lanka’s strongest allies overseas, are heavily involved in investments and infrastructure development in Sri Lanka.
Subsequently with the world economy improving and Sri Lanka succeeding, finally, to overcome the LTTE’s military machine, there has been an increased inflow of remittances outside that of workers in the Middle East and elsewhere. Much of this has come through Central Bank bonds, the Colombo stockmarket and some foreign direct investments. The country’s reserves last year hit a record $6.6 billion.
Everything is so hunky dory that some government politicians are now saying that ‘we have so much foreign cash’ that if necessary ‘we can even stop the IMF loan’.
Though on paper it seems, the dollars are coming in, is that a wise thing to do – abandon the IMF facility just past the halfway mark?
The IMF facility, many are surely aware, has given Sri Lanka much more than a shot in the arm or tackling the bottom-line. The biggest incentive is the credibility issue vis-à-vis the human rights discourse. The fund presence has created the space for the government to go out and sell its bonds, market the country for tourism and investments. The IMF has become an unofficial guarantor of sorts until Sri Lanka is able to pull investments on its own.
Much more than the money that Sri Lanka is getting from the the fund, is the ‘comfort and credibility’ that investors have in putting their money in government bonds with the IMF being present here. ‘International investors look for signals of some positivism like the presence of an international institution and where-ever organisations like the World Bank and the IMF are, it provides a kind of comfort zone that one’s money is safe,” one foreign investor said.
Thus any attempt to consider seriously abandoning the IMF facility should be nipped in the bud at a time when the economy is set to take off this year. Though there is confidence in government circles about an economic pick-up, ask any business leader in Colombo and also the chambers of commerce and the considered view is that though there is a lot of hype, there is little investment taking place by the corporate sector apart from hotels and a few power projects.
2010 was seen as a wait-and-see year, with the budget providing the signals for investment. 2011 has come and from all available indicators, the pick-up is yet to happen. So what’s the problem? “I just can’t put a finger as to why but there is no hectic activity. Maybe the cost of production is still too high with power rates going up and oil prices rising. It may be issues like this,” observed a chamber personality.
Food prices are rising here due to non-seasonal rain affecting rice production seasons while flood-affected Australia’s contribution to the world as the largest food supplier will be reduced quite a bit. Inflation could rise and pressure is on the government to hold down fuel prices which has climbed internationally to $102 per barrel on Friday.
With all these concerns, it would be foolish to call off the IMF facility when Sri Lanka needs foreign exchange to foot its import bill. Furthermore has the government done any proper analysis on what would happen to migrant workers when the per capita income goes up to $4,000 in a few years from little over half that figure now? With income levels also rising by that time, housemaids in Sri Lanka would probably earn around Rs 20,000 or $200 which is what they get abroad. These wages overseas won’t rise that much in the next 10 years and chances are there may be less remittances from abroad from less migration.
All this means Sri Lanka needs more foreign investment and better earnings from its exports. Enhanced FDIs need a confidence factor, a role which the IMF is playing at the moment. Try to remove that link in the economy and Sri Lanka is heading for unnecessary trouble.