No More IMF loans to Sri Lanka
Rate of Return
extends to $ 100 m a year
International
Monetary Fund (IMF) loans to Sri Lanka have been stopped
in 1995. Anton Op de Beke, IMF Resident representative in
Sri Lanka says Sri Lanka last had a three-year loan from
the low interest Enhanced Structural Adjustment Facility
(ESAF) in 1991. Disbursements had been suspended when the
agreed policies were not being implemented and after
several extensions the loan finally expired in 1995.
Instead the government now pays around $ 100 million a
year on the old loans.
Dinesh Weerakkody interviewed
Beke, for 'The Island'
Q 1: Recently you have gone public saying
that the IMF doesn't dictate, it only advises Ñ But, a
former Governor of the Central Bank has gone on record
saying that the government should not listen and be lead
by the IMF. Please comment.
A 1: The IMF's statutory role is, among other things,
to promote international monetary cooperation; facilitate
trade; and promote exchange rate stability. For that
reason, the IMF staff analyses the general economic
situation and economic policies in all member countries
on a continuous basis. The highlight of that so called
ÒsurveillanceÓ process is the annual discussion of each
country by the IMF's Board of Executive Directors. The
background document to that discussion and the assessment
by the Directors are publicly available so that everyone
who cares can learn about the thrust of the IMF's policy
advise. We are a policy advisor, but not an ordinary one.
Because of our statutory duties we must be persistent in
giving advice, even if it is perhaps not welcome.
Moreover, we are under increasing pressure to be open
about what it is we are advising. We provide our advice
in the course of our constant policy dialogue with the
Sri Lankan government. In between the annual reviews this
dialogue is carried on by the Resident Representative,
staff visits, and encounters between IMF and Sri Lankan
officials at international meetings. We also give
technical assistance in various forms. But there is no
question that the Government is fully responsible for the
policy decisions it takes. People who tell the Government
it should not listen to the IMF advice owe it to the
country to be specific. They should explain what policies
they object to and why. If they agree that there is a
problem, they should present alternatives. In the end it
should not matter whether a policy has been recommended
by the IMF but whether it makes sense. Constructive
economic policy debate is what Sri Lanka needs, not broad
brush stroke condemnations.
Q 2: Why has the IMF attracted so much criticism in
developing countries?
A 2: First I must say I believe that commentators in
Sri Lanka tend to exaggerate the extent of criticism of
the IMF. The public must wonder why an institution that
is so heavily criticized is allowed to carry on. In
reality, there is broad support for the policy principles
promoted by the IMF among policy makers and academics, in
developing and developed countries. Articulated
alternative economic approaches such as import
substitution or central planning are a thing of the past.
There is now near universal agreement on the importance
of controlling inflation and managing the budget deficit,
and for both to be consistent with the exchange rate
regime. Policy makers also generally agree on the
benefits liberalized external trade and on the need for
effective government regulation to overcome market
failures. There is serious discussion about emphasis,
design and specifics, but no about the principles.
Nonetheless, it is true at IMF programs are often
controversial. One reason is often when governments
resort to borrowing from the IMF to help them overcome a
balance of payments crisis, they have allowed the
economic situation to deteriorate to a point where only
radical and painful reforms will work. Inevitably that
creates controversy, but you can't blame a doctor for the
illness whether you believe in the cure or not.
Q 3: Talking about public sector reforms in Sri Lanka
what is the IMF's position?
A 3: For many years politicians, business people, and
the public at large in Sri Lanka have been talking about
the need to restructure the public sector. The view is
that the orientation of economic policy has changed
dramatically, but that the public sector has not kept up.
There are many institutions that have outlived their
purpose. There are also not enough civil servants who
have the educational background and training to tackle
challenging tasks of a government in a liberalized market
economy, and there are too many who do not. The IMF
basically agrees with this view and is urging the
Government to come up with an action program for slimming
down and strengthening the public sector. Government's
policy of bringing the budget deficit down to a
reasonable level would then also be more credible.
Q 4: Talking about privatisation, what is the IMF's
position regarding the Air Lanka privatisation?
A 4: Privatisation is an importantpart of this
restructuring of the public sector I just talked about.
Nowhere in the world has privatisation been easy. But Sri
Lanka can boast major successes especially with the
plantation sector, and recently with the partial
divestitures of Sri Lanka Telecom and Air Lanka. We
appreciate the Government's efforts to be as transparent
as possible about the transactions, and it certainly
tried very hard in the case of Air Lanka. A lot more
remains to be privatized. In our background report on Sri
Lanka of this year you can find a list of more than 70
commercial enterprises that are still fully government
owned, including some very large ones. In the financial
sector, state owned enterprises actually dominate. In
addition there are many government departments that would
probably run better if they were corporatised or
privatized.
Q 5: On the poverty alleviation what is the IMF's
strategy to deal with the principal cause of poverty,
unemployment?
A 5: There is strong empirical evidence gathered from
around the developing world that economic growth is a
powerful remedy for poverty. Therefore the IMF advices on
the kinds of macroeconomic policies and economic
structures that have proven to be conducive to economic
growth. In the case of Sri Lanka, the eradication of
poverty remains the greatest economic challenge. About
one quarter of the population, or one out of four
persons, live below a poverty limit defined in terms of
caloric intake. The trend may be heading downward, and
this record may compare favourably with other countries
in South Asia and with Africa, but that in no way
diminishes the urgency of the problem. Growth works to
reduce poverty because income growth for the population
as a whole is found to be tightly linked to income growth
for the poor. More than any other part of the population,
the poor depend predominantly on raw labor power for
their subsistence. Economic growth that increases the
demand for labor, particularly unskilled labor, will
therefore reduce poverty. Targeted government
intervention can strengthen these effects increasing the
productivity of the poor through education or by
expanding their access to physical and financial capital.
Q 6: Talking about welfare spending, why is it that
the IMF has expressed concern about the composition of
our welfare spending.
A 6: Our concern about welfare spending in Sri Lanka
is that it remains affordable and does not undermine
fiscal discipline. This can be achieved by targeting
welfare payments to the people who are most in need.
Currently more than half of the population receives
Samurdhi benefits, many more than the program intended to
benefit. Thus, we are not opposed to welfare payments.
Not only is there a moral obligation to help the poor,
but a social safety net is also important for national
cohesion and to secure support for economic reforms. As I
said, we also favour investments in human resources,
especially to raise the productivity of the poor, through
spending on education and health care. But, here too, the
Government must know what it can afford and carefully
design programs to achieve its objectives.
Q 7: According to government ministers, Sri Lanka's
economy has performed well despite a world economic
crisis. What is your assessment of our macro-economic
management?
A 7: Indeed, the direct impact of the Asian crisis has
bypassed Sri Lanka. The main reason was that Sri Lanka
had not been the haven to foreign investment that the
Southeast Asian countries had been. In those countries
foreign investment went as high as 10 percent of GDP; in
Sri Lanka it has always hovered around 1 percent. But
some speculative pressure on the Rupee developed
nonetheless late 1997 and early 1998, to which the
Government responded wisely by sticking to its flexible
exchange rate policy and raising interest rates sharply.
The Asian crisis aside, the usual yard sticks for sound
macroe-conomic management are success in bringing down
inflation and in reducing the fiscal deficit to a
manageable level. While 1997 was definitely a success in
that regard, progress in 1998 was disappointing.
Q 8: Is it also true that the IMF has increased the
level of assistance to Sri Lanka?
A 8: The IMF does not provide financial assistance to
its members on an ongoing basis, as do the World Bank,
the Asian Development Bank, and the bilateral and other
donors. Instead, the IMF provides financial assistance in
cases of acute balance of payments problems, or when a
government faces a serious growth problem that it is
prepared to resolve with an ambitious macro-economic and
structural reform program. In the first case, loans are
disbursed within one year, in the last case over three
years. These loans don't finance particular projects but
are made in return of a commitment to a policy program
that addresses the underlying problems. Sri Lanka last
had a three-year loan from our low interest enhanced
Structural Adjustment Facility (ESAF) in 1991.
Disbursements were suspended when the agreed policies
were not being implemented, and after several extensions
the loan finally expired in 1995. Since then, the IMF has
not disbursed any funds to Sri Lanka. Instead Sri Lanka
is repaying its old loans. Presently at a rate of about $
100 million per year.
Q 9: Finally, what are the lessons from the Asian
currency crisis that our government should be mindful of
as we move into the next millennium?
A 9: There are a lot of lessons to be learned. One is
that in a world of large and fast cross border capital
flows, sound economic policies matter more than before.
Sri Lanka is not immune from this despite the fact that
the capital account is not fully liberalized. Even now
there are capital inflows, for instance into the stock
market and into the banks, and despite the controls
capital always has ways of flowing out. Not only should
policies be sound, but the Government must convince
foreign and domestic investors alike of the fact that
they are. This require a great degree of transparency
about fiscal, monetary and exchange rate policies. A
third lesson is at a well regulated and sound banking
system is vital to balanced economic growth. Here the Sri
Lankan Government must deal with the consequences of lax
policies in the past and at the same time prepare for the
challenges of the future.
