Sri Lankan minister sees no point in demonizing IMF amid attempts to resolve external crisis
ECONOMYNEXT – A senior Sri Lankan minister says the demonization of the International Monetary Fund as a scary creature doesn’t fit the story, as the country tries to tackle external problems without the Washington-based lender.
Sri Lanka has not told the IMF that it will demand bloated civil service spending controls, what pro-state Western analysts and the progressive press call “austerity” as well as currency depreciation.
President Gotabya Rajapaksa’s Sri Lanka Podujana Party has generally opposed free market policies and strongly supported import substitution tax arbitrage, autarky and state expansion mainly by shoveling in cash unemployed graduates.
The administration launched an extreme Keynesian stimulus backed by record money printing after cutting taxes, triggering a massive external crisis, prompting many to call for an IMF program.
Several cabinet ministers of coalition partner Sri Lanka Freedom Party have come out in favor of the IMF.
This week, Dullas Alahapperuma, a senior SLPP minister, said the IMF should not be demonized because the country was also a member of the agency and has taken loans in the past.
Sri Lanka should not forget that it has been a member of the IMF since 1950, he said.
“So don’t speak with the idea that this is an organization that is not related (adar-ler na-thi) to us, since we are a member country,” Allahapperuma said.
Sri Lanka became a member of the IMF on August 29, 1950, the day after the creation of a central bank capable of printing money to fix the interests triggering external crises, like many in Latin America.
Until August 29, 1950, money printing (setting unrealistic interest rates relative to domestic credit) was prohibited under a British currency board (hard peg) and Sri Lanka’s foreign exchange reserves were equal to 93% of imports (11 months).
It was only second to a few countries like Switzerland, which had foreign assets of 145% of imports according to central bank data.
“To be about the same, an individual should have enough money in the bank to support the usual needs of his household for almost a whole year,” the central bank of Ceylon said in its annual report for 1950.
“When we compare Ceylon’s figure with the corresponding figures of other small countries that are also highly dependent on international trade, Ceylon comes out quite well.
“For Belgium, the percentage is 39%, for New Zealand 49% (1949) and for Denmark only 12% (1949).
“In contrast, Switzerland, a country renowned for its financial strength, the figure is 145 percent.”
Countries like Singapore retained the currency board system (floating interest rates) after independence, which allowed them to have hard currencies, domestic economic and social stability, and free trade.
Hong Kong set up a currency board in 1982 and GCC countries like Dubai have monetary authorities that mimic currency boards.
Alahapperuma said Sri Lanka had made 19 transactions, including during the reign of President Mahinda Rajapaksa.
At a “decisive stage” of the war, Sri Lanka had taken US$2.5 billion from the IMF.
“It was the highest money ever taken,” Minister Allahapperuma said.
“I suggest we don’t paint it as a big scary creature (ma-har bille-kuge roo-pa-yak), but we have to look at it in relation to the story.”
“But as a government, we have not yet made a decision for the discussions. In the last cabinet meeting, no decision was also made.
IMF programs generally don’t solve long-term problems because no attempt is made to prevent the central bank from making ‘flexible’ or ‘arbitrary’ decisions, critics said, allowing countries to engage in a Keynesian revival.
Sri Lanka had already taken several measures usually considered “IMF prescriptions” to reduce state interventions that contribute to the external crisis.
These include a freeze on additional hiring, the removal of price controls, which would reduce shortages of certain items.
However, in January, Finance Minister Rajapasksa suddenly increased salaries and state pensions, ending a two-year freeze, as inflation from two years of note printing made unions reluctant. .
“There are things that could be done by us and there are things that cannot be done by us,” he said. “It will not depend on what the World Bank or the IMF want, but on what our people and the country want.”
This week, the central bank also lifted price controls on interest rates, raising its key rate for which money is printed to hold it by 50 basis points at 6.50% in a bid to cut sharply unrealistic interest rates.
Liquidity injections over the past two years to fix interest rates had led to a sharp decline in reserves, as new money was exchanged for reserves to maintain the exchange rate, raising doubts about the government’s ability to repay the external debt.
The government is seeking more central bank lending and swaps to maintain buffer reserves.
“We ruled out an IMF program because this program we launched would work,” Central Bank Governor Ajith Nivard Cabraal told a news conference on Thursday (20) after raising the fixed interest rate at which money is printed at 6.5% versus 6.0%. .
“Even if the IMF comes, what different program could they prescribe other than say restructure your debt?” Cabral questioned.
“We are waiting for an unknown program rather than looking at the program you have in front of you. Most of the things we talked about have materialized.
“We talked about trades, these are coming. We talked about various facilities from country to country. You have seen that these announcements are made.
“So you have to be aware that there is one program being implemented and we don’t need two or three different programs and confusion.”
An IMF program typically encourages a currency float to end sterilized currency sales (selling reserves and printing an equal amount in domestic currency to fix the interest rate) to end reserve depletion , raise taxes to reduce the deficit and domestic credit, and raise rates enough to stimulate domestic savings to a level where balance of payments deficits (cash injections) end and resources are generated to repay the debt.
Sri Lanka has negotiated borrowing from India and China for swaps to secure more foreign currency as the balance of payments deficit continues to rise.
China helped with a 10 billion yuan (about US$1.5 billion) swap that helped boost the country’s gross reserves as expected inflows did not come and
India this month deferred a US$515 million payment to the Asian Clearing Union and pledged a new US$400 million swap. It is also helping with a US$1 billion line of credit for essential food and medicine and an additional US$500 million for fuel.
Finance Minister Basil Rajapaksa, announcing a 229 billion rupee relief package on January 3, said the government would do what the people wanted. (Colombo/January 21, 2021)