Kath Noble

How to look stupid

Posted in The Island by kathnoble on March 11, 2009

What to make of the Government’s admission that it is seeking an emergency loan from the IMF – an institution it professed to detest.

The Government ended up with a rather unattractive splash of egg on its face last week. After months of denying the need for a loan from the IMF, it had to admit that negotiations were underway. And the confession was all the more embarrassing given that these ever so passionate rebuttals had been preceded by what had seemed like years of denouncing the organisation. But foreign reserves are apparently dangerously low, and no other sources of finance have presented themselves.

Whether or not this really is the only available course of action is rather difficult to tell. Such decisions generally aren’t made in the public eye, perhaps for good reason. Money can flow out of an economy pretty quickly if people start to doubt its soundness, or the wisdom of those in charge. But good reason is often abused by politicians, becoming an excuse not to explain their poor choices to the voters. Deprived of the necessary information, they can’t judge the Government on its handling of the situation.

It is however only too easy to assess responses to the declaration. And twofaced would be putting it very mildly indeed.

The UNP was particularly vocal, obviously delighted at having caught Mahinda Rajapaksa in a significant policy change. Ravi Karunanayake spoke of a travesty of justice. The country was going to fall into debt, he cried, and the IMF would impose damaging conditions. He even dared to express concern over the fate of Government subsidies. Other hypocrites soon echoed these worries. Ranil Wickremasinghe was almost as convincingly appalled as his junior, demanding that Parliament be informed of the interest rates and conditions under which the loan was being taken.

Opposition parties are supposed to act as a watchdog, and nothing the UNP said was incorrect. Sri Lanka will obviously increase its debt stock by borrowing $1.9 billion, and not even the Government spokespeople despatched to tell the media otherwise could possibly believe that the IMF will not ask for something in exchange. After all, there is a history to look at here.

The last time Sri Lanka took an emergency loan from the IMF, under Chandrika Kumaratunga in 2001, it insisted on quite a lot. Most prominently, the currency had to be allowed to depreciate. In the Government’s letter to the IMF, it also undertook to cut the budget deficit by increasing taxes on imports, freezing wages of public servants, increasing administered prices of fuel, water, electricity and transport, reducing defence expenditure and speeding up the divestiture of shares in Sri Lankan Airlines, the Cooperative Wholesale Enterprise, Shell and Sri Lanka Telecom. Another of the promises the IMF extracted from the Government was to make it easier and cheaper for businesses to fire employees by agreeing standard formulae for compensation and fixed time limits for the approval of involuntary redundancies. People’s Bank and the Bank of Ceylon were also set to be restructured.

Although fifty percent of the total borrowed was disbursed on signing the loan agreement, the rest of the funds were given in several instalments to allow for monitoring of compliance. And the IMF wouldn’t have made even the first payment if the Government hadn’t taken action on many of these issues in advance.

We know this now, but it wasn’t so clear at the time. Chandrika Kumaratunga didn’t present the options to the people, nor did she explain that she was about to put them $250 million into debt. They would be making the interest payments, but without having a clue as to how and why.

So the idea that the IMF will hand over money for use on whatever the Government feels like is simply mad. And there is every reason to be worried about the Sri Lankan debt burden, given that the need to pay back loans taken in the past is as much to blame for current problems as the global financial crisis. A lot of previous borrowing has not resulted in the economic benefits that it was supposed to, and there have been plenty of negative effects too.

Opposition parties are therefore right to question, but they are also supposed to have policies of their own, at least on important matters like the economy. People have to make a choice at elections, after all. And they can only do so effectively if politicians are consistent in their statements on these issues.

The UNP sounded ridiculous criticising the Government for its change in policy simply because it had fully embraced the IMF when it held office. It was perfectly reasonable to point out that Mahinda Rajapaksa was not sticking to his word, but the UNP shouldn’t have done so without reference to its own position.

Ranil Wickremasinghe committed to a loan of almost $600 million from the IMF in 2003, and that wasn’t an emergency situation. Carefully negotiated over a year or more, the agreement was backed up with a lengthy document setting out Government policy on just about everything from water to pensions. The UNP sought out the IMF when it didn’t actually have to, presumably because it agreed with the economic model that had long been pushed by the organisation. Or perhaps Ranil Wickremasinghe was just happy to try it out for the sake of a few hundred million dollars.

It doesn’t seem necessary to go into details here, given that the IMF is known to be rather set in its ways. Indeed, reviewing the reports of its annual consultations with the Government show that it has been harping on exactly the same issues for years, if not decades. We are talking about the supposedly holy trinity of privatisation, liberalisation and deregulation.

The IMF selected a few items from its wish list as conditions to be signed up to by the UNP, while leaving several others in the capable hands of the World Bank and the Asian Development Bank. It focused on taxation, the financial sector, privatisation and reforms to the labour market. By 2003, the UNP had already made quite a bit of progress on all those fronts, but there were still areas in which the IMF felt a little encouragement would be helpful. Actions required before the initial disbursement of the loan included the privatisation of the Sri Lanka Insurance Corporation, and we know how smoothly that went.

Given the UNP enthusiasm for IMF policies, it might at first appear strange for there to have been conditions. But perhaps this was just an indication of its concerns about the growing signs of resistance amongst voters. Indeed, many other undertakings scheduled for the first year of the programme ended up being ignored. These included extending VAT to the wholesale and retail sectors, divesting more shares in Sri Lanka Telecom and the Colombo Hilton, and further work on the restructuring of People’s Bank. A whole lot of laws were to be changed too, from bank regulation to tax administration. A full list would take up far too much space than could be justified here. By the time the IMF agreement was signed, the UNP would only be in power for another year.

The failure of one partner was soon reflected in the other. Observers have been claiming that the IMF closed its office in Colombo because the Government had been obstinate in refusing its help, but the truth is rather different. Anybody who had visited the few rooms the organisation maintained in the Central Bank wouldn’t have thought it very important anyway. While the UNP was busy losing an election, and then a lot more, the IMF was similarly having its position undermined. Its economic model had been discredited and countries simply didn’t want to borrow its money any longer. Without loans, the IMF found interest payments decreasing rather quickly, landing it in a severe budget crisis.

It would appear sensible therefore to urge caution in the coming weeks as the talked about deal is finalised, if there is no alternative. Disclosure would be a pleasant change, and it might help prevent the kind of backlash that almost did for the IMF. A splash of egg on the face would be even more unpleasant for the Government if the egg turned out to be rotten.

This article was published on the editorial page of The Island on March 11th, 2009. The internet version can be accessed here.

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