Feature Article

IMF takes charge in Sri Lanka

[TamilNet, Tuesday, 28 July 2009, 00:02 GMT]
Whilst Sri Lanka’s government hailed its securing of an IMF loan for $2.6bn last week as a ‘victory’ and as indication of international support for its political and economic policies, the reality is the reverse. Sri Lanka has been compelled to accept not only painful economic and quasi-political obligations, but also the kind of external supervision the ultra-Sinhala nationalist regime routinely rails against. Moreover, whilst the IMF loan is ostensibly to revive Sri Lanka’s economy, its first purpose is to ensure the government keeps up with repayments to prior foreign lenders. In short, Sri Lanka can borrow from the IMF to pay back its creditors but has to undertake harsh economic reforms - under IMF supervision - for the breathing space.

Last Friday, the IMF approved a 20-month Stand-By Arrangement for Sri Lanka for US$2.6 billion, of which US$322 million will become immediately available.

Central Bank chairman, Ajith Niward Cabraal was quoted as saying that the IMF’s decision is a “big victory” and a “huge boost in confidence” for Sri lanka.

According to this logic, the IMF has decided to lend Sri Lanka the money because so many countries on its board support the government of President Mahinda Rajapakse and its policies.

“The IMF has accepted the Mahinda Chinthanaya policy for the country’s economic development,” Mr. Cabraal told the press.

Rajapakse ploughing furrows behind buffaloes to encourage subsistence farming
Rajapakse ploughing furrows behind buffaloes to encourage subsistence farming
The reality is almost exactly the reverse.

As Mr. Takatoshi Kato, the IMF deputy managing director and acting chairman of the board, put it: "the government should take advantage of the opportunity created by the end of the conflict to ensure national reconciliation, restore macroeconomic stability, and promote strong and durable growth."

These beguilingly abstract words entail significant consequences for the Rajapske regime and the island’s near future.


The IMF is the ‘lender of last resort’ for states that are unable to secure credit on the international market.

Formed after WW2, the IMF’s raison d’etre is ensuring global economic stability i.e. to ensure states’ mismanagement of their economies does not damage the global financial system.

In the past sixty years, the IMF has become a powerful proponent and enabler of neoliberalism, an ideology now adopted widely (and often reluctantly), that advocates the supremacy of markets and the minimizing of state interference in them.

This month’s $2.6bn loan to Sri Lanka is part of a global strategy being unrolled by the IMF to stabilize and bolster the global financial markets still shuddering from the global credit crisis of 2008.

Whilst there has been vocal criticism of Sri Lanka’s brutality towards the island’s Tamil population by Western states, the IMF’s priority is ensuring the global financial markets continue to lend and are not further unsettled by borrowers defaulting.

In this context, whilst the United States, Britain and France – along with Germany and Argentina – are reported to have abstained from voting for the loan, thereby signaling their disapproval of the Rajapskse regime, they certainly did not actively seek to block the funds.


Following the turmoil which began last year, several countries around the world have been reluctantly lining up to accept the IMF’s stringent terms for its support to get out of their predicaments.

It is only at times of acute crisis that countries have accepted the IMF’s punishing conditionalities. For example, several countries in East Asia were compelled to go to the IMF after the financial crisis that swept through the region and thereafter across the world of 1998.

Sri Lanka is presently heavily in debt to foreign lenders, a condition made acute as the Rajapakse regime has been borrowing furiously on international markets to finance its high-intensity and bloody military onslaught against the Tamil Tigers.

Even by December 2008, Standard and Poor, the global ratings agency cut Sri Lanka’s credit rating to five levels below investment grade, citing mounting government debt.

At least two recent attempts by the Rajapske government to issue sovereign bonds produced lackluster interest from international markets. Even Colombo’s declaration of victory over the LTTE failed to spur interest in Sri Lanka’s bonds – at a time when Emerging Market issues were soaring.


It is in this context, despite its public bravado that the Colombo government has been compelled to accept the portfolio of conditions that the ‘lender of last resort’, has imposed.

The $2.6bn Stand-By Arrangement is effectively a large credit card that can be used for specific purposes - and that only so long as Colombo is adhering to certain forms of conduct. While $322m is immediately available, the rest will be phased in, subject to the IMF’s quarterly reviews. An IMF team is due in Sri Lanka soon.

To begin with, Sri Lanka must prioritize the repayment of foreign debt – a promise Colombo tucked away in its letter of intent (LoI); paragraph 12, titled ‘greater flexibility in the exchange rate’, declares: “the Government is committed to staying current on all its external debt obligations.”

Secondly, Sri Lanka promises not to borrow more than $1.75bn in the next 20 months (paragraph 7). Colombo will also not intensify existing foreign exchange restrictions or introduce any new restrictions or multiple currency practices.

All this serves to ensure foreign lenders can extricate themselves from Sri Lanka and that the country will gradually become less of a threat (by way of potential defaults, say) to the global financial markets than it presently is.

As IMF deputy managing director Kato put it, one of the purposes of the loan is to ensure “restore [Sri Lanka’s] fiscal and external viability.”


But if borrowings are limited this way, in the absence of strong earnings, it is state spending that must be cut and it is in shaping domestic policy that the IMF’s medicine promises to be most bitter.

Amongst the agreements the IMF has forced from the Rajapkse regime are:
  • To aim to contain 2009 central government deficit to 7 percent and to reduce the overall deficit to 5 percent of GDP by 2011 (from 7.7 percent in 2008). That means military spending will have to be curbed.
  • To end the substantial state subsidies to state-owned commercial enterprises. Specifically, the Ceylon Electricity Board and the Ceylon Petroleum Corporation will have to break even, without state subsidy, by end-2011.]
  • To increase tax revenue by at least 2 percent of GDP in 2011 with measures to broaden the revenue base, significantly reduce tax exemptions, and improve tax enforcement.
The consequences are clear; as one foreign headline put it: “Sri Lanka’s citizens will feel pinch.” In short, with subsidies ending, prices will go up.

Moreover, Sri Lanka has to cut its staggering military spending. In order to defeat the LTTE, the Rajapakse regime expanded the army to over 160,000 soldiers. By way of comparison, Britain’s army is 100,000 strong.

Quite apart from serving to dominate the island’s Tamil-speaking Northeast, the almost all-Sinhala army serves as indirect subsidy – by way of soldiers’ lavish salaries – for large sections of the rural Sinhala population.

Now that Sri Lanka has declared the war over, the IMF expects the military to be cut back. The future, according to the IMF’s neoliberal model, rests on private entrepreneurship, not state subsidies.

All of this is the exact reverse of ‘Mahinda Chintana’ (‘Mahinda’s thinking’), the ultra-Sinhala nationalist manifesto put forward by the Rajapske for his presidential campaign.

Rather than private entrepreneurship, the economic developmental model laid out in Mahinda Chintana turns on Sinhala-nationalism’s veneration of the Sinhala peasant – of the ‘sons of the soil’ living by the temple, the tank and the paddy field.

President Rajapakse has been pictured ploughing furrows behind a pair of buffalo and visiting sites where the subsistence farming is encouraged – the vision embodied in the leader (king) himself.


Despite the supposed separation of economic and politics claimed by neoliberalism that the IMF’s calculations work on, the ethnopolitical crisis gripping Sri Lanka cannot be ignored.

To this end, the IMF’s contribution to ending Sri Lanka’s repression of the Tamils appears as economic, rather than political, demands.

As IMF acting chairman Kato put it, the bank’s loan seeks to “address the significant reconstruction needs of the conflict-affected areas, thereby laying the basis for future higher economic growth.”

In other words, quite apart from the beginning economic reforms on which the IMF newly-extended support depends, Sri Lanka also has to end its internment of hundreds of thousands of Tamils in military-run, overcrowded and diseased camps.

To secure the loan Sri Lanka has had promise that its priority – once the ongoing foreign debt obligations are met – is to resettle 70-80 percent of the interned Tamils by the end of 2009.

Few observers, however, expect this to be honored. Indeed, with the ink not yet dry on the loan agreement, the government has already reduced resettlement to 60%.

In reality, 2009 will in all likelihood end with the majority of Tamils locked up in the squalid camps.

Moreover, Sri Lanka has sought to justify using future donor funds for its continued militarizing of the Northeast: as the letter of intent states, a “key element of the reconstruction plan include restoration of law and order…”


So what if Sri Lanka ignores the promises it has made to secure the IMF loan?

One analysis, by Reuters news agency, suggests “initially, the IMF is likely to be flexible, taking into consideration Sri Lanka's post-war situation. However, continued failures to meet conditions will compel the lender to stop disbursement of the loans.”

The IMF discontinued a previous loan programme due to Sri Lanka's failure in adhering to its conditions in 2001, the agency pointed out.

That loan had been extended to President Chandrika Kumaratunga’s regime, which – despite its rhetoric ‘of the left’ – pursued the neoliberal agenda, some analysts say, more successfully than the pro-market opposition.

The question, then, is how firm the IMF will be with the Rajapakse regime, especially on resettling the incarcerated Tamils as a condition for future disbursements.

As Human Rights Watch has protested, given Sri Lanka’s track record, the iMF loan is “a reward for bad behavior, not an incentive to improve.”

Defending its loan against criticism, the IMF said this week it was in regular contact with humanitarian groups and diplomats over human rights worries.

Certainly, the terms of the loan – with its quarterly reviews and continuous IMF oversight – provide for powerful international leverage on the now beholden Sri Lankan state.

The point is underlined by the government’s agreement that if the global economy worsens and hurts Sri lanka’s exports, remittances and capital flows, it will consult the IMF on the appropriate policy response.

Moreover, the saga of Sri Lanka’s loan from the IMF has shown that politics and economics are intertwined. Economic developmental ideology itself – neoliberalism and Mahinda Chintana – is deeply political.

It has also shown that geopolitical analysis based on competing spheres of influence has its limits in a globalised 21st century.

No state, no matter how economically well off, can step in as the lender of last resort for another. That remains the sole preserve of the IMF – with its bitter medicine.



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