Local newspapers recently reported a peculiar incident. A European benefactor had wanted to donate books and school items to needy children. He requested a boutique hotel owner he knew to find the recipients, which was duly complied with. On the day of distribution, the donor was in for a shock. The parents of the “needy children”, he saw, had expensive mobile phones – some even Apple iPhones. He also saw a few children and parents in the audience playing online games on their phones. He could not fathom how those who can afford such devices were considered poor and needy. He was surprised because he, who uses a device purely for communication, neither owns an iPhone nor uses what he owns for games. He distributed the items, as planned, but was not content. He had that hollow feeling that anyone gets when their best efforts yield poor results.
No, the IMF and Sri Lanka have nothing to do with that story. The International Monetary Fund (IMF), as its website claims, works to achieve sustainable growth and prosperity for all of its 190 member countries – including a tiny island nation in the Indian Ocean. It does so, in all good faith, by supporting economic policies that promote financial stability and monetary cooperation, which are essential to improve productivity, job creation, and economic well-being. It is the responsibility of the receiver to make IMF feel better. The Fund should not, in the end, feel like the benefactor of the above case.
I mean, the IMF certainly knows Sri Lanka is not a poor country. The Fund has probably more accurate data on us than we do. So they may not be blind to the fact that we were enjoying life as a middle-income category country before the express train hit. The IMF probably also knows that neither the politicians nor top bureaucrats are affected by the economic crisis. They are doing nobly well as they did before the crisis.
Only the poor are deflated by inflation when overnight the cost of living increased twofold. The middle class found their incomes had eroded.
I would like to think the poor and the middle class were IMF’s focus. If it were not the case, both IMF and Sri Lanka have to rethink their local strategies. Conditions per se will not achieve this goal.
There are other realities the IMF should pay attention to. Sri Lanka, a developing nation, is not too different from other countries in its category. The system of governance is frail. Sometime back, India found if the government wanted to spend one rupee on citizens, in reality, only 15 cents reached them. Sri Lanka’s situation probably is worse. Sri Lanka has no or inadequate anti-corruption mechanisms. This is a topic that needs no further elaboration. Internationally, there were multiple instances where IMF funds had been diverted elsewhere. The most prominent example comes from Russia.
According to a report by the Wall Street Journal in August 1999, federal and state authorities were investigating potential money laundering through the Bank of New York, with suspicions that Russian organized crime had unlawfully taken a portion of IMF loans and other foreign economic aid designated for Russia. The Bank of New York was the 16th largest asset-holding bank in the United States, and it was believed that up to $10 billion was laundered through the bank. This alleged siphoning of funds occurred around the same time that a prominent audit company discovered that Russia’s central bank transferred $1.2 billion in IMF money to a firm it controlled, called Financial Management Co. This incident should certainly serve as a lesson for other IMF bailout recipients.
Even if we address corruption, equally important is the question of who benefits most from the IMF funds. Not all investments target development. There was a time the country went crazy with building its infrastructure. In 2012 alone we borrowed $10 billion – some of it as commercial loans at much higher rates. We built seaports and airports. A ghost airport at Mattala finds an aeroplane landing, perhaps, once a month. Who benefitted from these? If it were the citizens, it was only those who laboured in these projects and supplied food to Chinese labourers working in them. The vast majority of the population saw nothing coming to their plates. This is not to say building infrastructure per se was unproductive, but there should have been plans to use them.
The IMF must also note the way political games are played here is too different from the practice in developed nations. South Asian constituencies vote for those who provide them with the maximum amount of freebies. I could not verify the fact, but the story goes that Lee Kuan Yew called the Sri Lankan elections the distribution moments of non-existent assets. The underlying truth is so undeniable. This has been a practice with a long history. It was so prominent that during the 1970 election, one party claimed it would offer two measures of free rice to every citizen, even if the rice had to be imported from the moon. At least they had the brains not to fulfil the promise. Many later governments crossed the line and fulfilled their election promises of freebies. The worst practices were seen in the second Mahinda Rajapaksa government. They first offered motorcycles and semi-trucks at discounted prices. The final infamous offer was of white clothes for a substantial number of Buddhist devotees, just one day before the election. There is no guarantee that history would not repeat itself.
These are only part of the IMF bailout baggage. Despite all the strict conditions imposed by IMF, there is a certain possibility that the bailout per se might not bring the desired outcome. In other words, discontinuing money printing is not adequate for the recovery. While that gives some sort of relief, there is a huge risk that we take when we undergo an IMF assistance programme. While countries such as South Korea used the IMF funds for a quick recovery, we also have nations such as Argentina that made the whole process a mess.
We’ve had 16 IMF programmes so far, and we could sustain only six. We go for the seventeenth with a success rate of 37.5%. This time, the conditions are even stricter. The government still does not have a plan to fully earn its annual income through taxes. Even with the increase in rates, the earnings will cover only a fraction of the expenditure. The incentives to break the rules are high
There are one or two things we know about all IMF programmes. They are not country-specific. Neither do they aim for the growth of the economy. Rather they want that to happen as an outcome of the programme. It may look puerile, but all IMF programmes are typically aimed at lowering inflation. The history goes back to the neo-liberal thinking popularized by Milton Friedman who thought inflation was the biggest monster a country’s economy faced. This was true for most Latin American nations, where he diligently worked with governments to overcome the crisis. The issue is applying it everywhere like a mantra. Money printing is certainly unjustifiable. It can make an economy end with hyperinflation. Still, as shown above, inflation is not the only monster we have to tackle.
Purely for the sake of argument let’s look at what will happen if the IMF funds do reach the economy. Any new money introduced to the system, irrespective of whether they are rupees or dollars, increases the money supply. To control inflation, this upsurge should be matched with rising production. If there is no increase in production, i.e. IMF funds are used for an activity that earns no additional income, then the bailout can result in the same outcome as injecting printed money into the system. Interestingly, it may contribute to rising inflation. So the monster will be back, even with the money printing presses silenced.
Then the issue many economists dare not speak about but fear privately: what is the guarantee that Sri Lanka will sustain the IMF programme for four years? Our track record is not great.
We’ve had 16 IMF programmes so far, and we could sustain only six. We go for the seventeenth with a success rate of 37.5%. This time, the conditions are even stricter. The government still does not have a plan to fully earn its annual income through taxes. Even with the increase in rates, the earnings will cover only a fraction of the expenditure. The incentives to break the rules are high. Few elections will not make the situation better. This is a Damocles’ sword we have to live with. All efforts of obtaining the IMF bailout will go in vain if we do not sustain the programme at least for four years. If that happens, the next blow, in another 4-5 years, will be far worse.
In my previous articles, I discussed what Sri Lanka must do right now. It’s a no-brainer. Just follow the paths of the South-East and East Asian nations on their way to industrialization and (now, a better option) digitalization. While other income streams like tourism will help, there is no other single way to speedily advance exports and GDP. The economic policies must be immediately changed to allow this transition, in a similar manner to what South Korea did in the mid-1970s. Without this essential move, Sri Lanka will never be able to get out of the wheelchair it has been sedentary since 1947, with or without IMF assistance.
Despite all the strict conditions imposed by the IMF, there is a certain possibility that the bailout per se might not bring the desired outcome. In other words, discontinuing money printing is not adequate for the recovery. While that gives some sort of relief, there is a huge risk that we take when we undergo an IMF assistance programme