Sri Lanka dusts off the begging bowl
By Feizal Samath
COLOMBO - Sri Lanka is going on bended knees to the International Monetary Fund
(IMF) - an institution it chased away two years ago - for a bailout package
worth US$1.9 billion as the country's authorities scrape the barrel for foreign
exchange.
Sri Lanka's imports are valued much higher than its exports and foreign
exchange reserves, which have normally averaged over three months worth of
imports.
The crisis is two-fold: sagging export income and the Central Bank using the
few dollars it has to intervene in local money markets to defend the rupee from
depreciating against the US dollar.
At the same time, the government's access to cheap commercial
borrowing from foreign sources to fund the costly war against separatist Tamil
rebels and other state expenses has dried up with the global financial
meltdown.
Last week, the government took the plunge and announced it was in negotiations
with the IMF for a $1.9 billion standby arrangement.
Central Bank governor Ajith Nivard Cabraal - who has been criticized by
economists and opposition legislators for misleading the country on the state
of its finances - was quoted as saying: ''The offer was made for a facility
without conditions. We didn't think we needed it but then this happened to be a
good opportunity.''
The country had $1.7 billion in gross official reserves at the end of December,
sufficient just for 1.5 months of imports, compared with more than $3.5 billion
a year earlier.
Senior economist Sirimal Abeyratne from the University of Colombo told Inter
Press Service (IPS) that the financial crisis is so acute that Sri Lanka had
few choices. ''Otherwise, why ask for money if we have money, particularly from
an institution [IMF] that the government didn't want,'' he said.
Dushni Weerakoon, senior economist at the Institute of Policy Studies, said Sri
Lanka's main problem has been the ''outflow of foreign exchange last year
following the global economic crisis and using whatever resources we have to
defend the Sri Lanka rupee in local money markets''.
She told IPS that in addition to an outflow of $600 million after foreigners
withdrew money in central bank bonds in the second half of 2008, the bank has
been pumping some $200 million a month (in the last three months of the year)
in an unsustainable exchange rate policy to prop up the rupee.
Sri Lanka last year kept its exchange rate at about 108 rupees to the US dollar
until October 2008 as the government sought to slow inflation. The rupee has
since dropped to about 114.30.
The move to return to the IMF for emergency cash comes after the government
virtually threw the organization out of the country in January 2007, with the
IMF closing its Colombo office, saying it had no program left.
The opposition and economists at that time said the government had come under
pressure from hardline partners like the JVP (People's Liberation Front) and
the JHU, formed mainly by Buddhist monks, who frowned on Western-led
multilateral agencies like the IMF or World Bank and their tough, conditional
lending.
The last IMF facility to Sri Lanka was a $567 million loan given in April 2003
to support the government's 2003-2006 economic program. The first tranche of
$81 million was immediately received but the loan was suspended in November
2003 due to political problems and in April 2006 it expired. The IMF had set up
its Colombo office in 1979.
Loans from the IMF, generally seen as a lender of last resort, generally come
with conditions such as demands for a reduced budget deficit, cuts in
government spending, tighter monetary policy and a flexible exchange rate
policy, which would allow the rupee to float freely against major currencies.
At present, the rupee rate is fixed by the Central Bank and adjusted in
accordance with import requirements.
Exporters have complained over the years that the rupee has been artificially
held high against the dollar, resulting in lower export incomes. The rupee is
pegged high to keep import costs, particularly of food and fuel, down.
Government economists and the central bank have repeatedly denied the existence
of a crisis. Exports are down and garments, the biggest earner, are getting
squeezed out in other markets, while jobs are also being shed across other
sectors.
The Employers Federation, a business group, has asked the government to reduce
the number of working days per week to five from five-and-a-half days in a bid
to cut costs.
Weerakoon said the government's problems had been compounded by the shortage of
commercial borrowing avenues in the international markets after the financial
meltdown.
Sri Lanka is not the only country struggling to make ends meet as the global
financial crisis continues. At least $25 billion will be needed in urgent
concessional financing this year to help countries affected and prevent
millions of people from falling back into poverty, according to a report
published on the IMF website on March 5.
Hugh Bredenkamp, deputy director of the IMF's strategy, policy and review
department and one of the study's authors, said that Ghana and Sri Lanka are
good examples of the relatively few low-income countries that, prior to the
crisis, had began to get access to international financial markets to help
finance their budgets.
Bredenkamp said both countries were hit as the markets essentially shut down.
Ghana had plans to issue a big euro bond last autumn but had to put that on
hold, and Sri Lanka has seen the spreads on its international borrowing rise to
essentially prohibitive levels.
At the same time, both countries have seen foreign investors exiting from their
domestic bond markets. So those two avenues for financing budgets are now
drying up, Bredenkamp said in the report.
Other economists said much of the country's spending, particularly on the
military, came from domestic borrowings and when that dried up, it came from
foreign borrowings from commercial sources, and China and Iran.
Sri Lanka has been relying on China for political and economic support after
turning away from the once-favored West, which has been repeatedly critical of
the government in Colombo over human-rights violations.
Early last year, before the global crisis, the government was so gung-ho about
the access to cheap credit from commercial sources that one powerful Finance
Ministry official told a senior World Bank staffer: ''We don't need your
conditional money. We have access to cheap credit without conditions.''
With foreign reserves fast dwindling, the central bank, whose governor is a
political appointee and former advisor to President Mahinda Rajapaksa, in
February announced two measures to shore up reserves: raising $500 million from
Sri Lanka's diaspora and currency swaps with other central banks in the region.
None has worked as expected. Weerakoon says the swaps and diaspora funds do not
work in the short term, a view shared by bank governor Cabraal. ''We have
exhausted access to domestic borrowing and international markets [or it has
dried up]. In currency swaps, there is an agreement with the Malaysian central
bank while the authorities are also discussing a similar arrangement with
India,'' she said.
Cabraal said some accounts had been opened by Sri Lankan expatriates in the
bond market, but the process was slow.
Economist Abeyratne said Sri Lanka was in a debt trap, where one had to borrow
to pay off debts. ''We are down to our lowest levels. Diaspora funds have not
come as expected. Last year, the government paid close to half a million
dollars in debt payments and this year it will be higher. So we are borrowing
to pay off our debt - which is where part of the $1.9 billion IMF facility will
go.''
Weerakoon said the debt payments will increase this year once some central bank
bonds expire and payments are made. There was also payment to be made to Iran
for an oil credit line, she said. ''There is quite a list of payments.''
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