There are many debates these days about why Sri Lanka should or should not seek assistance from the International Monetary Fund (IMF) to overcome the current debilitating economic crisis.
Looking at four things about the current economic situation which is historically unprecedented for Sri Lanka – the country’s reserves have fallen to one and a half months of imports, a record since the establishment of the Central Bank; credit ratings are low and Sri Lanka has lost access to international financial markets; the debt-to-GDP ratio increased by 24% in two years and total public debt, including public enterprises, reached 119%. The country’s interest cost of government revenue is 71%, the highest in Sri Lanka’s history and the highest in the world.
These are some of the points that were debated last Tuesday when the Sunday Times Business Club (STBC) hosted a discussion on ‘Going to the IMF’ at the Taj Samudra Hotel in Colombo. Economists from LankaClear Chairman Dr. Kenneth De Zilwa and Verite Research Executive Director Dr. Nishan De Mel shared their thoughts. Economics professor Sirimal Abeyratne was the moderator. It was the club’s first physical meeting in two years, with this year’s host hotel being the Taj Samudra.
Dr De Mel, in his remarks, said: “Sri Lanka has approached the IMF 16 times in the past, that’s why we have a governance problem. The government does not know how to manage its economy well. We need a diagnosis of whether it is the prescriptions of the IMF or poor governance in Sri Lanka that got Sri Lanka into trouble. The country has a problem of lack of commitment to good conduct.
“The IMF gives a program and monitors it and when you are in the program you have to behave. It becomes an external commitment device because the internal commitment devices do not work. The IMF is locking up the government for better behavior,” he added.
Sri Lanka has had good growth for six years in the past, including three years when the country was under the IMF program. The correlation and people’s opinion that the IMF leads to lower growth is unfounded. Sri Lanka’s own history provides an example of how the country has been run under the IMF program and when it hasn’t, Dr De Mel pointed out.
The only way forward for Sri Lanka is to restructure its debt. “We have to reach out to creditors and take a loss on the debt. The longer we wait, the more fuel shortages, drug shortages, inflation, depreciation of the rupee will increase every week. The delay is costing the country’s economy enormously. The IMF is extremely important for debt restructuring. They can do debt viability analysis, build credibility and trust leverage to find you the best creditors, pay you if you stop paying creditors,” he noted.
Expressing a different view, Dr De Zilwa said: “Sri Lanka should only revise the profit story by making the country’s export, manufacturing and industrialization sector competitive for it. achieve, not services, as we have seen now. It’s not by going to the IMF. The IMF will tell you to depreciate the currency, raise interest rates, give up reserves, sounds good, but is extremely dangerous. Broadly too, the IMF has done the same. Not all developing countries that have sought IMF assistance have prospered. These are destructive policies that the IMF introduces in countries that erode competitiveness.
Revisiting the IMF now will be to the detriment of business. The country has seen this cycle repeat itself for so many years since 1965, that is 16 times. “If we did everything the IMF said through multiple governments and programs given to us, couldn’t we have done the right thing now? It’s a shame for us to go there for the 17th time,” he added.
He also noted, “Due to the accessibility of finance due to the ongoing problem of financing the trade deficit, the country has had to resort to capital markets, borrow and finance. The trade deficit continues to widen, which to date is the crux of the problem that has led us to a huge cash flow problem. The country has a $10 billion deficit that needs to be funded. The current account does not respond sufficiently to adequate financing and we are therefore forced from 2009 to go to the capital markets.
He said that of Sri Lanka’s total debt today, $12.5 billion is capital market debt. “The rest is long-term multilateral and bilateral debt that causes us nothing and whose average interest rates are manageable. It’s the capital market debt that’s the problem, because it’s short-term. It is refinanced every two or three years depending on how we issue bonds to finance the budget deficit. The budget deficit is also a chronic problem for us where our expenditures are relatively high and poorly managed,” Mr. De Zilwa noted.
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