In all 16 stabilization programs supported by the IMF since 1965 in Sri Lanka, the decision to go to the IMF has been dictated by the country’s own failure to keep the macroeconomic house in order. Sri Lanka had to go to IMF repeatedly because country deviated from sound macroeconomic management principles when it was not with IMF programs.
What is IMF?
The International Monetary Fund (IMF) was set up in 1945 to help member countries resolve balance of payments difficulties. Unlike the other multilateral and bilateral lenders who lend to the government of the borrowing country, the IMF always lends funds to the central banks of the country. The IMF loans are strictly for the purpose of building international reserves to meet external payments. Therefore, borrowing under IMF programs does not have any direct impact on domestic money supply and hence on domestic inflation.
The financial facilities provided by the IMF are of two types: normal bridging financing required for balance of payments management, including concessional credit facilities to help facing unforeseen external economic shock (such as global oil price increases and commodity market collapse), specific lending programs to undertake macroeconomic reforms. There are two such loan programs: the Stand-By Agreement (SBA) facility and the Extended Fund Facility (EFF). The SBA, introduced in 1952, in designed to assist member countries to manage short-term balance of payment crisis by rebuilding foreign exchange external reserves, strengthen the fiscal position, maintain monetary stability, and fortify the domestic financial system. The length of the typical SBA program is 12 to 18 months and loans are to be repaid within a maximum of five years. The EFF was established in 1974 to provide support to comprehensive structural adjustment programs encompassing SBA policies and structural adjustment policies required to correct structural imbalances over an extended period. Normally the duration of these programs varies from three to five years, and repayment is over four to 10 years from the date of drawing. The policy reforms prescribed by the IMF under SBA and EFF programs are known as ‘IMF conditionality’. Of these two, EFF is the appropriate program for Sri Lanka for coming out of the current crisis.
The amount of the IMF loan under SBA or an EFF depends on the size of the member country’s quota at the IMF, outstanding loans from the IMF, and assessment by the IMF of the country’s financial need, capacity to replay and track record. Entering into an IMF supported program also acts as a catalyst to generate additional international financial assistance in three ways. First, having a macroeconomic adjustment program with the IMF is often a prerequisite for obtaining World Bank adjustment loans. Second, as part of entering into a stabilization program, the IMF arranges aid consortia of donor countries to assist the given country. Most of the donor funds harnessed under these consortia are outright grants or long-term loans that carry low interest rates and a grace period of 5-6 years. Third, credibility of the reform program gained by entering into an IMF program helps raising funds at competitive interest rates from private capital markets. Thus, the presence of IMF provide an implicit guarantee to other donors.
Currently the basic interest rate is 1 percent + a service surcharge depending on the size and duration of the program. Borrowing from the IMF is much cheaper than raising funds through sovereign bond issues, borrowing from other commercial sources and short term bi-lateral borrowings like currency swaps interest rates of which could be around 6%.
Why some people are against IMF?
The core of an IMF stabilization program is a ‘letter of intent’ that contains the conditionality agreed with the IMF. These conditionalities vary from case to case, but typically focuses on four key variables: budget deficit, the rate at which domestic credit is created, interest rates for both depositors and borrowers, and the exchange rate. The relationship between the IMF and its developing-country members under stabilization programs has not always been smooth owing to the conditionality attached to programs.
Countries go to IMF when their economies are in distress. Such situation occur due to economic mismanagement and reforms are often painful for the public. In such a context, naturally there is a tendency on the part of the governments to pass the blame to the IMF despite the fact that economic crises are often due to their own poor economic management. Such scapegoating often leads many to believe that the IMF forces countries to take politically disagreeable, and sometimes economically costly, action. The reality is however that the short-term pains of good reforms provide the rewards of long-term stability, economic growth and improved welfare of the public.
Of course, not all IMF supported programs have been equally successful in all countries. However, popular complains about failures have often ignored the situation in which countries found themselves when the IMF was brought or failure to implement agreed reforms. In particular, when it is too late to seek IMF support, the reforms often fail to restore debt sustainability and market access, leading to repeated restructuring. Countries that have approached on time and strictly followed the agreed stabilisation programs have often managed to re-established debt sustainability and enter a phase of economic recovery.
Why does Sri Lanka need IMF assistance?
Since 1965 Sri Lanka has been a ‘repetitive client’ of the IMF. The country has entered into 16 economic stabilization programs since 1965. Macroeconomic management of the country has been under IMF programs for approximately 33 years since 1965. The IMF fully disturbed agreed funds under 12 (approximately covering 25 years) of these 16 agreements. The conditionality attached to the agreements has notably varied over time depending on shifts in the development thinking of the IMF and macroeconomic conditions and the underlying political developments of the country.
In all 16 stabilization programs supported by the IMF since 1965, the decision to go to the IMF has been dictated by the country’s own failure to keep the macroeconomic house in order. There is no evidence to suggest that the IMF insisted on implementing a stereotyped policy package in all ‘crisis’ cases. In fact, international financial institutes cannot implement a program in any country without the request from the country. Governments headed by two major political parties in Sri Lanka have gone to the IMF in times of need. The recipient government of IMF assistance has some leverage to shape up the reform package to suit the local conditions, however, within sound macroeconomic management principles.
An analysis on the economic growth performance of Sri Lanka while it is with IMF program and without IMF program clearly shows that outcome in Sri Lanka during the IMF program years has been better. Have the programs been successful in setting the stage for sustainable growth? This is an important issue because the very purpose of IMF stabilization programs is to achieve ‘adjustment with growth’. Addressing this issue requires an in-depth analysis of individual programs, paying attention to the program objectives, problems cropped up in the implementation process, and the impact of the programs on the overall incentive structure of the economy. A cursory review suggest that IMF programs resolved the issues but when the program is over country deviated from sound macroeconomic management principles resulting destabilization. That’s why Sri Lanka has to go to IMF again and again.
The popular concern in the Sri Lankan policy debate that entering into an IMF program could involve sacrificing equity and fairness in development policy is not valid anymore It is an old complain that justifiably reflected the IMF’s emphasis on economic stabilization per se in the early post- second world war decades. The IMF’s approach to stabilization and structural adjustment reforms has been significantly transformed from about the early 1990s in line with the universal focus on shared, inclusive development.
There is no evidence to suggest that the IMF has used a heavy hand in shaping economic stabilization reforms in Sri Lanka in the past. At this late hour Sri Lanka has no option other than seeking IMF assistance. The government has appointed an educated and experienced Governor to lead the negotiation and world renown three professionals to advice the Sri Lankan team. At this critical juncture every Sri Lankan’s wish should be that quick negotiation and start of IMF program without any further delay.
Emeritus Prof. Premachandra Athukorala,
Crawford School of Public Policy,