Notes to the People: Should Sri Lanka Seek IMF Support?
By Sumanasiri Liyanage (Ceylon today 13-11-2021)
The triple crises in Sri Lanka -the economic, the epidemiological, and the political- appear to be aggravating day by day. Although many countries suffered from a COVID-19 outbreak are slowly but gradually coming out of the economic crisis created by the pandemic, there are no signs of such a development in Sri Lanka.
The prices of all essential goods have rocketed. Farmers are still indecisive as to whether they cultivate or not for the Maha season. Media covers news of protests, demonstrations and strikes in almost ever part of the country. Heavy rains and related disasters may exacerbate the burdens of poor people. The list may go on, but it in itself may not provide an answer to any of these issues.
The crisis is multi-faceted. If this column limits itself to its economic facet, the economic crisis may be branded first and foremost as a forex crisis. Nonetheless, the surface appearance may not signify the truth in its totality. It was a crisis of neoliberal capitalism introduced to Sri Lanka in 1977.
Forex Crisis
Marx always advised us to start the analysis at the level of ‘real concrete’ i.e. what is immediately visible. Figure 1 shows the foreign exchange requirement of the country in the next five years.
It is quite clear that the present crisis, in the event of not necessarily corrective measures being taken, would drag with the same intensity up to 2026 if not until 2030.
Sri Lanka gets foreign exchange mainly in five sources, namely:
(1) export of commodities made in Sri Lanka;
(2) Providing variety of services to foreigners;
(3) remittances of Sri Lankan people working abroad;
(4) foreign assistance and loans;
(5) a portion of foreign investment spent in Sri Lanka. (1), (2), and (3) are included in the current account in the Figure 1. Sri Lanka needs foreign exchange because the rest of the world does not accept the Sri Lankan rupee. The Korean war gave a good price for our rubber. So, we had a current account surplus and foreign money came into Sri Lanka. This favorable situation was followed by what is called Tea Boom in 1954. We were a creditor country. However, by 1960, Sri Lanka found that it could no longer be able spend lavishly on imports of goods and services, so that the first import restriction regime was introduced.
In 1977, the J R Jayewardene regime envisioned the idea that restricting imports and producing those goods locally would not resolve country’s problem. The economy should be oriented towards export of goods and services. The result has shown that the new policy shift did not help. Figure 2 shows our trade balance and current account balance in the last forty-five years.
Without splitting hairs, one may easily conclude the export-oriented economic strategy failed. How do we finance the deficit? In the first five years or so, the rest of the world was kind to Sri Lanka pumping in generous amounts of foreign assistance. By the late 1980s the honeymoon was over. Sri Lanka was an indebted State. In order to finance the current account deficit, lavish spending on infra-structure and debt servicing, Sri Lanka was able to get more and more foreign loans in many forms. The expanding international capital markets provided a space that makes borrowing through ISBs possible.
Two Remedies
How to come out of the impasse? Two views may be identified. The first group proposes that Sri Lanka should seek the support of the International Monetary Fund. This group includes Ranil Wickramasinghe, the leader of the UNP, academics like former deputy governor of the CBSL, W A Wijewardane and the think tank like Advocata. Their argument is two-fold. Sri Lanka can ask for nearly US dollar 3 billion from the IMF in most probably three installments.
If the IMF agrees to the request, rating agencies would raise Sri Lanka’s credit ratings. As a result, the Government of Sri Lanka can raise more funds from the open capital markets in order to meet the foreign funding requirements for at least the next three years. Secondly, the IMF requires Sri Lanka to adopt certain measures as a pre-condition of approving a loan and these conditionalities would act as corrective measures and that in turn would raise investor confidence.
The second view is held by a group inside the Government and they argue on the basis of many experiences that the IMF policies would be deflationary and would reduce the rate. They particularly refer to the IMF prescription to reduce the fiscal deficit. Hence, they prefer the home grown policy package in place of the IMF prescriptions. In the Asian financial crisis, they argue, that Malaysia was able to come out of the crisis quickly because it refused to adopt the IMF proposals.
Nonetheless, the so-called home-grown package in Sri Lanka has so far failed to work. The crisis has spread all the cells of the economy. Ironically the main opposition Samagi Jana Balavegaya or Janata Vimukthi Peramuna, though critical of the Government policies, have not presented an alternative policy framework.
There is no doubt, the present crisis needs drastic measures. A drastic reduction of imports and more incentives to increase exports are needed. Above mentioned, (1), (2) and (3) needs special attention. However, it is not adequate to meet the foreign funding requirements for debt servicing in the next four years that exceeds US dollar 4 billion a year. So, my observation is that Sri Lanka with regard to foreign debt should either default or go for a unilateral moratorium at least for 5 years.
Together with debt default, measures, direct and indirect, should be taken in aiming at equilibrium between the total production and total consumption. As I mentioned in my last week column, tax concession, energy rationing, and imports have to be rationalized to increase production and to cut cost.
In my view, posing the question whether Sri Lanka should approach the IMF is an incorrect way of solving the economic crisis.
The writer is a retired teacher of Political Economy at the University of Peradeniya.
sumane_l@yahoo.com