The Sunday Island yesterday front-paged a picture which had all the trappings of a supreme irony and epitomised diplomatic hypocrisy. It showed Foreign Minister Rohitha Bogollagama and US Secretary of State Hillary Clinton with broad saccharine smiles. The adjacent lead news item said the IMF Executive Board had granted Sri Lanka a much awaited standby credit facility of US$ 2.6 billion without the US supporting it. (Other countries that abstained were the UK, France, Germany and Argentina.)
Government politicians are dancing in the streets over the release of the loan. It will, no doubt, stand the Sri Lankan economy in good stead much to the relief of the government as well as the public. But, the fact remains that it is nothing but a loan to be paid back and there are some conditions that the government will have to satisfy, to qualify for the whole credit package to be given in tranches. This time round, the IMF conditions are not as constricting as feared and make some economic sense but they are sure to entail considerable politico-social costs.
According to the government's Letter of Intent submitted to the IMF, it has undertaken to reduce the budget deficit to 5 per cent of GDP by 2011 in line with the Fiscal Responsibility Act. Some of the measures it has promised to adopt are stepping up revenue including broadening of tax base, reducing tax exemptions and improving enforcement coupled with action to rationalise expenditure.
Will the government be able to carry out its pledges? This year's budget deficit has shot up from 6.5% (estimated) to 7.00% (revised) as opposed to 7.7 % in 2008––estimated deficit for that year was 7.00%!––partly due to some economic stimulus packages.
The government will have to continue with flexibility in the exchange rate while building up reserves to at least three and a half months of imports by the end of the programme period. Free floating will benefit exporters, if the rupee depreciates with a trade deficit, but it will have an adverse impact on essential imports including petroleum products. A likely outcome is a considerable rise in local prices. Exporters stand accused of non-repatriation of export proceeds in full. So the question is whether benefits would accrue from their gain to the country in a big way in case of depreciation of the rupee.
The government will also have to ensure that the Ceylon Petroleum Corporation (CPC) and the Ceylon Electricity Board (CEB) will break even by 2011. Consumers are already paying more for fuel and electricity and their burden is very likely to be aggravated when action is taken to reduce CPC and CEB losses. It is hoped that the government will handpick some technocrats with proven track record to run these two institutions without stuffing them with henchmen like the former pacie-turned CPC Chairman who committed the country to a disastrous oil hedging deal and got away with it thanks to his political connections. IMF conditions or no IMF conditions, these two loss incurring ventures must be turned around.
In 2001, it may be recalled, the IMF discontinued a credit facility as Sri Lanka failed to achieve prescribed targets. Given issues such as reconstruction and rehabilitation said to require a whopping sum of US$ 750 million, many subsidies and handouts for the vulnerable sections of society, an ever expanding public sector salary bill and, above all, chronic profligacy and widespread corruption constituting a huge drain on the State coffers, the government will have its work cut out to meet the IMF-set targets.
The IMF-prescribed economic pills, however efficacious they may be in curing the country's fiscal ills, have injurious political side effects, as evident from the predicament of the UNF government which tried its hand at cost cutting only to be kicked out by people at the next election. So, the Rajapaksa government may have succeeded in turning the tables on some meddlesome western powers including the US and getting the IMF loan but, will it be able to meet the conditions in question or achieve that task without hurting itself politically?
The government is planning to go for a presidential election either in December or early next year. Before that, Budget 2010 will have to be presented with measures to meet the IMF conditions. This is a worrisome proposition for the government; it is in an unenviable position in spite of its euphoric rhetoric.
However, the government’s economic goal will not be unattainable, if it battles waste and corruption while pulling itself up by its bootstraps on the economic front. Former US Ambassador Robert Blake told a conference in October, 2007 in Colombo that Sri Lanka's economy would have grown by two more percentage points but for corruption. MP Wijeyadasa Rajapakshe recently said funds that a damning COPE report released under his chairmanship had helped save amounted to about one half of Sri Lanka's GDP! Presidential Advisor Vasudeva Nanayakkara wrote to President Mahinda Rajapaksa on June 23, as reported in this newspaper, that the country had lost as much as one thousand billion rupees from 1985 to 2005 owing to frauds and corruption that big corporate companies resorted to in acquiring State properties.
If waste and corruption could be eliminated, perhaps there may not be any need for the government to panhandle.