THE LENDER OF LAST RESORT

Isanka Perera describes the role of the IMF in reviving Sri Lanka’s economy

The IMF and our government reached the much awaited staff level agreement to support Sri Lanka’s economic policies. So what does this mean for Sri Lanka? And what happens next?

In 1944, 44 countries expressed an urgent need for a framework for international economic cooperation as global economies were in shambles following the Great Depression and World War II. The IMF was established in response to that need and today, its membership comprises 190 countries – Sri Lanka joined in August 1950 as its 50th member.

The so-called ‘lender of last resort’ pursues its mission of promoting financial stability and monetary cooperation among member countries, by monitoring financial and economic policies, offering macroeconomic and financial policy advice, providing technical assistance – especially to low and middle income countries – and offering loans or bailouts when they meet eligibility requirements.

It also implements specific structural adjustments designed to encourage governments to reform their fiscal policies and restore economic equilibrium.

The IMF’s primary source of funds is the capital that countries pay as their quota subscriptions based on their relative positions in the world economy. Sri Lanka currently has a quota of Special Drawing Rights (SDR) 578.8 million, which represents a 0.14 voting share.

Meanwhile, this staff level agreement – which is subject to approval by IMF’s management and executive board – has allocated US$ 2.9 billion to Sri Lanka under its 48 month Extended Fund Facility (EFF) arrangement.

EFF provides medium-term assistance to economies with critical payments imbalances relating to structural maladjustments and an inherently weak balance of payments position that would require a longer adjustment period.

Sri Lanka has been the recipient of 16 IMF programmes prior to the most recent arrangement. The initially agreed amount wasn’t disbursed on seven occasions as the country was not fully compliant with conditions imposed by the lender to ensure that it would be able to meet its obligations against the facilities obtained.

Despite having been at the forefront of global economic crisis management over the years, the IMF has drawn criticism by economists worldwide. One common argument is that the bailout facilities overlook recipient countries’ unique economic, social and cultural milieu.

Some critics say the conditions for structural adjustments and macroeconomic intervention the IMF imposes are too harsh, and have harmed developing countries. It has also been criticised for a lack of transparency, and biased and inconsistent decision making – and for promoting neoliberal policies such as privatisation.

In some instances, economists argue that the IMF made critical mistakes in diagnosing the 1997 Asian financial crisis and caused a minor economic slowdown that turned into a deep recession. Greece is a conspicuous example that has been repeatedly cited as evidence of how the IMF’s austerity measures exacerbated a country’s economic contraction.

However, for decades the International Monetary Fund has assumed the role of firefighter in financially troubled nations.

It needs to be remembered that financial crises are inevitable in any economy, and can be corrected by adopting remedial policy reforms and monetary practices. Therefore, the need for a financial rescuer in such economic and political ferment should not be underestimated.

The IMF has outlined the economic reforms that Sri Lanka needs to follow to restore macroeconomic stability. They include tax reforms, fuel and electricity pricing reforms, social safety net programmes, and a market determined and flexible exchange rate.

Other conditions include safeguarding financial stability and restoring the autonomy of the central bank, as well as a sustainable debt restructuring plan.

Sri Lanka’s road to recovery is long and laden with many challenges – and the IMF’s bailout programme is the only viable solution available to the country at this time.