Sri Lanka needs IMF even if it doesn’t want it

Originally appeared on The Morning

By Dhananath Fernando

With the visit of US Secretary of State Mike Pompeo, Sri Lanka’s national discourse shifted from the 20th Amendment to foreign relations. State Secretary Pompeo’s visit grabbed national attention for many reasons; one main reason being economic and diplomatic tensions between the world’s two largest economies, the US and China.  

Sri Lanka has transitioned through different phases of foreign policy, from the post-independence era to recent times. When the late Lakshman Kadirgamar was the Minister of Foreign Affairs, his main challenge was to stop the financing of the Liberation Tigers of Tamil Eelam (LTTE), while communicating to the international community the ground reality. With the tragic tsunami in 2004, the helping hand we received from our international friends cannot be forgotten. During the last stage of the civil war, we had to again seek assistance in terms of intelligence, supplies, diplomatic support, and military hardware from our neighbours and other economic powers. 

After the war, the next challenge was facing allegations of human rights violations at the United Nations Human Rights Council (UNHRC) and at the same time managing the development of our economy, in a post-war context. Therefore, we had to work tirelessly to regain the Generalised Scheme of Preferences Plus (GSP+) concession and to remove the fish export ban in order to strengthen our economy. 

Unfortunately, after gaining independence and secondly after the end of the war, Sri Lankan rulers have failed to carry out the necessary economic reforms to make our economy competitive. We have made gigantic investments in non-tradable goods by borrowing huge sums of money at high-interest rates on shorter-maturity in foreign currency and lived beyond our means. The investments we have made were not properly evaluated and have hardly generated adequate revenue to settle the loans we have taken. About 42% of the foreign debt portfolio is International Sovereign Bonds (ISBs) and our public finance management has been extremely poor. As a result, we are in a position today where 47% of our revenue has to be paid just to cover the interest of the loans we have taken.

In contrast to this, our overall average post-independence economic growth is about 4.2%, and it was just 2.3% in 2019. This year, it will be an economic contraction, not growth, which means we will be deep in negative territory. This crisis, coupled with the global Covid-19 pandemic, has resulted in our foreign exchange earnings being badly hit. The secondary bond market signals on yields and the rating downgrade by Moody’s has indicated that Sri Lanka’s finances are in a bad state.  

The foreign policy of a country is often connected to the country’s economy and trade. Most of the time, a policy stance has to be arrived at by considering the context of challenges of a country. Today, the importance of a good foreign policy has come to play again, especially in the context of servicing our debt. All the swap agreements and bilateral support are based on our relationship with our neighbours. However, the main questions remain: How do we get the assistance and from whom are we going to get it? 

On the one hand, during the visit by a high-level Chinese delegation led by Chinese Communist Party Political Bureau Member Yang Jiechi, it was reported in the media that we signed a credit facility agreement of $ 500 million and in July, the Reserve Bank of India (RBI) signed a currency swap facility of $ 400 million with the Central Bank of Sri Lanka. 

On the other hand, there is a $ 480 million Millennium Challenge Corporation (MCC) grant with zero interest – free money which is still hanging around the corner, and yet, the Government hasn’t communicated their stance to the donor agencies on whether we are going to take it or not. There were very sensitive political debates during the last presidential election, mainly on the land component of the MCC agreement on the basis of sovereignty and territorial integrity. Things have changed, now that the members of the then ruling party who believed that the MCC was a worthy agreement to sign with no impact on our sovereignty, are now opposing it. Similarly, members who vociferously opposed the agreement when in the opposition, are now turning a blind eye to it, while the Government provides general statements rather than a specific policy stance, such as “we will not sign any agreement that affects territorial integrity”. 

On our debt servicing obligations, we have to pay about $ 4 billion every year for the next three to four years just to roll over our debt. In this context, it is not only about getting money to roll over debt that matters. It has to be about financing through sources whom we could assure are fiscally disciplined and attempt to build investor confidence – this is what matters. Only then will markets take Sri Lanka seriously and we will be able to invest in foreign currency at somewhat lower interest rates. Otherwise, we will be caught up in the vicious cycle of taking more loans to pay the interest at even higher interest rates with a low growth trajectory. 

The question is, what could be the country or agency which ensures financial discipline and could build the confidence of investors worldwide? The only player in town that could do that is the International Monetary Fund (IMF). When a country is on an IMF programme, that respective country has to jointly agree to a programme on bringing the necessary structural reforms to secure the funding. So the respective government has a strings-attached relationship and pressure to perform well.

However, we have to understand that securing an IMF programme is not a thing to be proud of and it’s a signal that we have managed our finances very badly. It’s just a bailout programme. Our policy-makers have to conduct economic reforms in such a way that our economy can perform well, without seeking any help from the IMF. Sri Lanka often boasts that we have honoured all our debt commitments throughout our history. Unfortunately, this clean record is not due to our amazing financial management. We have run to the IMF 16 times so far for bailout programmes whenever we have had a balance of payment crisis and faced the risk of default. In fact, for almost half of Sri Lanka’s post-independence history, Sri Lanka has been under an IMF bailout programme.

The Government has lately maintained that they do not expect to seek IMF assistance and they are confident of managing the situation with the current financing strategies. However, I must highlight that we have to seek IMF assistance fast, without waiting any further, as we have a good story to sell on Covid-19 containment, despite the latest outbreak. The other reason for urgency is that there is a long line of countries waiting to get IMF assistance. The more we delay, the higher the intensity of the pain.

Interestingly, it was reported on The Sunday Morning under the headline “IMF still considering RFI request” that Sri Lanka had applied for the IMF’s Covid-centric Rapid Financing Instrument (RFI) earlier this year but that the application is still under review. The article goes on to say that the IMF had received just over 100 requests from countries seeking RFI support and as of mid-September, about 76 requests had been approved, meaning that Sri Lanka is among approximately 20 or 30 countries that have not been granted RFI support. If this is the case, it is likely that the Government is yet to agree to certain terms of the IMF and therefore, the application is still pending.

Ultimately, whether Sri Lanka has gone to the IMF and not been approved yet or Sri Lanka is not interested in an IMF programme, Sri Lanka needs an IMF programme now to ensure fiscal discipline and regain investor confidence. Going to the IMF often is not the solution, but it is probably the best option left for us to overcome the situation. Only time will tell how good or bad the strategies implemented are. My only hope is that whatever strategy that gets implemented persists for several years, at least. 

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.