ECONOMYNEXT – Sri Lanka’s economic and political crises are worsening with the currency having collapsed steeply and continued money printing for various purposes creating yet more forex shortages.
The country, which after a 26-year war was expected to follow the development trajectory of Singapore or Dubai due to its geographical location, but with a money printing central bank with aggressive open market operations instead of a currency board like agencies like in Singapore or Dubai, the country now finding it hard to raise a few million dollars to pay for its next fuel shipment.
There are long queues for fuel, cooking gas, and kerosene. People have cut down their food intake and changed their food habits, because everything is expensive. Many people are compelled to risk their lives and commute to work clinging to any available railing or door handle of tightly packed buses and trains as ongoing fuel shortages adversely affect public transport. More than a dozen people have died while waiting in fuel queues.
Daily power cuts continue and people are facing malnutrition. An ambulance service – usually available islandwide for free – said this week that it’s operation has been hit by the fuel crisis, even as people complain of medicine shortages as forex shortages and price controls remain.
Schools and public offices also remain closed as the unprecedented energy crisis deepens.
Despite all this suffering by the people, friendly countries and governments which have a strategic interest in the island nation have chosen to adopt a wait-and-see approach. Most of them have said they will come once the country has secured a deal from the International Monetary Fund (IMF).
Some countries have given financial assistance to buy medicines and food, and India has given money to buy oil and other goods.
Government officials who are aware of discussions the government leaders had with the United States, countries from the European Union, India, China, Japan, and Middle Eastern countries – either for some loan or fuel credit or investments – say the responses have not been encouraging.
With the International Monetary Fund saying that the country’s debt is unsustainable, multilateral agencies’ hands are tied. Western governments and Japan will also not fund a country whose debt is unsustainable and get the country into more trouble.
An IMF program will usually control the central bank’s money printing and restore economic stability through a monetary program and will also try to reduce the deficit and contain a minimum of economic reforms and liberalizations to help the country grow.
The US, particularly after the winding down of the Economic Co-operation Administration (the Marshall Plan Agency) has preferred to work through the World Bank and IMF which has policy clout in recipient countries through formal treaties and USAID now mostly gives grants not debt.
The IMF through its membership with the fiscal agency – usually the central bank – and the finance ministry, is able to devise and implement a wide-ranging macro-fiscal plan, which individual counties have no authority or skills to do.
Through the monetary targets in an IMF program, the agency is able to curtail domestic credit, stop forex shortages by reducing outflows, restore a working pegged regime to start re-building reserves, restoring the ability to repay any new debt and also re-structured debt for which relief has been given.
An IMF program therefore gives confidence to both private lenders and official creditors to lend again.
Diplomats from Asia and the West along with higher-level government officials and Sri Lankan diplomats say many countries have lost their “trust and confidence” in Sri Lanka.
Following are the key reasons they say why other countries are reluctant to help crisis-hit Sri Lanka while forex shortages are still persisting and making imports like oil difficult.
Bankruptcy: For the first time in its history, Sri Lanka declared sovereign debt default on April 12, announcing that it was suspending the repayment of all the foreign loans. Many countries worry about the island nation’s repayment capability in the future. According to Prime Minister Ranil Wickremesinghe’s parliament speech on Tuesday July 05, Sri Lanka has to repay 28.6 billion dollars in debt from June this year to end 2027.
“We are now participating in the negotiations as a bankrupt country. Therefore, we have to face a more difficult and complicated situation than previous negotiations,” Prime Minister Wickremeinghe, who is also the Finance Minister, admitted in his parliament address on Tuesday.
“Once a staff-level agreement is reached, this will be submitted to the IMF Board of Directors for approval. But due to the state of bankruptcy our country is in, we have to submit a plan on our debt sustainability to them separately. Only when they are satisfied with that plan can we reach an agreement at the staff level. This is not a straightforward process.”
The government has earlier said it expected an IMF staff level agreement by June – the IMF itself did not say so – and it is now expected in August.
Sri Lanka is hoping to convene a donor meeting with India, Japan and China, in line with the staff level agreement, but it is not clear whether it will be enough for other countries to start lending in a big way.
India, which is the only country that generously helped Sri Lanka with a 1 billion dollar credit line in the last three months, has also asked Sri Lanka to seek the IMF bailout for a sustainable recovery and has not yet extended their credit lines despite President Gotabaya Rajapaksa’s administration asking for another 1 billion dollars for fuel and other purchases.
Corruption: The IMF, in its statement after initial talks in Sri Lanka ended on June 30, included mitigating corruption as one of the challenges that needs to be addressed.
“Other challenges that need addressing include containing rising levels of inflation, addressing the severe balance of payments pressures, reducing corruption vulnerabilities and embarking on growth-enhancing reforms,” the IMF said in a statement.
Diplomats and senior government officials have told EconomyNext that corruption has been a key reason for lack of foreign investment in Sri Lanka, as well as economic instability and policy uncertainty.
In one instance in 2012, the final agreement for a 1 billion dollar investment was ready to be signed between the governments of Sri Lanka and Qatar during an official visit of the Emir of the State of Qatar Sheikh Hamad Bin Khalifa.
However, one prominent minister of that government wanted to delay the investment due to some concerns over the return. It came to light that the minister had wanted to negotiate for some changes in the finalised agreement. Qatar later abandoned the project. This murky past still has an impact on the diplomatic relations between the two nations.
Government officials say corruption is so deeply ingrained in Sri Lanka that clean politicians and officials are seen as abnormal. From the office clerk to the department head, people including foreigners are expected to give some “incentives” to speed up the processes, a senior government official told EconomyNext.
“The IMF has raised the corruption issue for the first time. Eliminating corruption means the country needs complete reform in police and the judiciary,” the official said.
“If the IMF is going to insist on this, then its loan programme is going to get delayed because most bureaucrats in the public service do not want this as they are the most corrupt.”
The United States Senate Foreign Relations Committee last week said that any IMF agreement with Sri Lanka must be contingent on independence of the Central Bank of Sri Lanka, strong anti-corruption measures, and promotion of the rule of law.
“Without these critical reforms, Sri Lanka could suffer further economic mismanagement and uncontrollable debt,” the U.S Senate Foreign Relations Committee tweeted, responding to the IMF statement.
Any @IMFNews agreement with #SriLanka must be contingent on @CBSL independence, strong anti-corruption measures & promotion of the rule of law. Without these critical reforms, Sri Lanka could suffer further economic mismanagement & uncontrollable debt. https://t.co/oMdT7QIwZP
— Senate Foreign Relations Committee (@SFRCdems) July 1, 2022
“Most of the countries know that all their efforts will be in vain if Sri Lanka does not eliminate corruption, and this is the reason the IMF and other countries have raised concern on corruption,” the senior government official said speaking to EconomyNext.
Diplomatic Blunders: Sri Lanka’s diplomatic blunders in the past two decades are hurting its chances of getting help from other countries. The best example is the relations with Qatar. Apart from reversing the 1 billion dollar investment deal at the eleventh hour, refusal to stop forced cremation and accusing the Qatar Charity of funding Islamic terrorism in Sri Lanka led the booming Middle Eastern country to hide behind the IMF when Power and Energy Minister Kanchana Wijesekera went to ask for fuel credit.
“Met with the Deputy Director General of the Qatar Fund for Development. Discussed possible Credit Line facility for Petroleum and Gas supply. Was informed that funds have been allocated for medical supplies and will consider the request for a credit facility and support the IMF program,” Wijesekera tweeted after his meeting with a Qatar Fund official.
Met with Deputy Director General of the Qatar Fund for Development. Discussed possible Credit Line facility for Petrolium and Gas supply. Was informed that funds has been allocated for medical supplies and will consider the request for a credit facility n support the IMF program. pic.twitter.com/tGy82y10Cs
— Kanchana Wijesekera (@kanchana_wij) June 28, 2022
He also met officials from the Qatar Charity and said that he “conveyed the message that the Defence Ministry has informed the Attorney General of its decision to lift the ban” imposed in 2019.
Met the Officials of the Qatar Charity yesterday. Conveyed the message that the Defense Ministry has informed the Attorney General its decision to lift the ban on the fund which was imposed in 2019. Discussed the Charity’s work in SL and globally. pic.twitter.com/tHzv7HduLV
— Kanchana Wijesekera (@kanchana_wij) June 30, 2022
A foreign ministry official who had served in the region said Middle Eastern countries work on trust.
“We have now broken that trust and nobody believes us when we request them for help in desperation,” the official said, asking not to be named.
In other instances, former president Maithripala Sirisena suspended all Chinese projects in 2015 after India and the US indirectly backed him at the presidential election against Mahinda Rajapaksa.
Incumbent President Gotabaya Rajapaksa who was seen as pro-China, unilaterally cancelled a 500 million dollar East Container Terminal (ECT) project signed with Japan and India and a 1.8 billion dollar Japanese Light Rail Transit (LRT) project, whose work had already begun.
President Rajapaksa also cancelled a 480 million dollar grant from the US-based Millennium Challenge Corporation (MCC), withdrew renewable energy projects awarded to a Chinese company through competitive bidding, and antagonised the United Kingdom, Canada, and European nations over a probe by the United Nations on alleged past human rights violations.
He also offended Muslim nations by his government’s non-scientific forced cremation policy of COVID-19 victims, followed by Christian nation after delaying justice for the victims of the 2019 Easter Sunday attack.
“One country informally said it will not help until Rajapaksas are in power,” a former cabinet minister in the ruling Sri Lanka Podujana Peramuna (SLPP).
“Some countries feel they (the Rajapaksas) are arrogant and egoistic.”
This week, President Rajapaksa spoke to Russian leader Vladimir Putin asking for fuel credit, a month after his government was involved in a diplomatic spat with Moscow by detaining a Russian Aeroflot flight through a court order.
Government officials say President Rajapaksa has also been giving in a lot to India, including the hand over of a part of the Trincomalee oil tank farm and the awarding of a lucrative wind power energy project to India’s Adani group whose owner is a close ally of India’s ruling Bharatiya Janata Party (BJP).
In bilateral relations, Sri Lanka has cancelled several projects with other governments and countries citing various reasons. It has also been carried away by other countries with vested interests.
Under a looming global recession, some foreign countries are reluctant to pump money and resources into Sri Lanka for nothing.
Stability: Many countries have raised concerns over political stability in Sri Lanka amid an uneasy peace between President Rajapaksa and Prime Minister Ranil Wickremesinghe.
Wickremesinghe, a solo member who entered the parliament via a bonus seat, has to depend on the Sri Lanka Podujana Party of President Gotabaya Rajapaksa. The Rajapaksas have retained their majority, thanks in part to a divided opposition.
Parliament cannot be dissolved by the president at lease until February 16, 2023, as per the constitution. This means the existing parliament has to pass through all the reforms the IMF wants while there is a risk of parliament turning down reform proposals.
Political stability is one of the key factors needed to implement an IMF deal which may require hard reforms.
Sri Lanka does not have the political stability the world wants and officials say the president could change the prime minister and ministers as and when he wants to. There is however broad support from the opposition Samagi Jana Balawegaya for an IMF program, which they have been calling for a long time.
Officials close to Wickremesinghe said the current prime minister could be changed at any given moment as he has given some space for the Rajapaksas to regroup though not to expected levels.
Nobody wants to invest in a nation that is going to get destroyed due to political instability, the officials said.
Past Experience: IMF programs have been victims of political changes in the past. The last programme approved under Wickremesinghe as prime minister in 2016 was suspended after President Rajapaksa came into power.
Not only was the program not completed but key tax reforms were completely reversed in a single day in December 2019, in a move that was unusual even for Sri Lanka.
Sri Lanka has failed to contain the budget deficit repeatedly in the past, breaking its own Fiscal Management Responsibility Law and changing its goal posts.
Sri Lanka is going to the IMF for the 17th time. Some critics have blamed the central bank which operates a permanently depreciating ‘flexible exchange’ rate for high inflation and balance of payments troubles.
But other countries with similar central banks, built by the US in the style of Argentina’s central bank have gone to the IMF 20 times or more.
The Philippines’ central bank, which was built by John Exter, the same US ‘money doctor’ as Sri Lanka along with fellow Fed official David Grove has gone to the IMF 23 times as its ‘flexible exchange rate’ with extensive money printing powers, collapsed.
El Salvador (Henry Wallich and John Adler) went to the IMF 22 times before it dollarized. Ecuador (David Grove) also went to the IMF 22 times before it dollarized.
Korea’s central bank built by the Fed official Arthur Bloomfield lasted only 7 years before it collapsed along with the Hwan currency triggering starvation had gone to the IMF 17 times including in the second re-incarnation.
Mexico, where Argentina central bank founder Raul Prebisch worked for a time, had gone to the IMF 18 times.
Latin American and Caribbean nations with central banks set up or modified by the US with more aggressive money printing powers, were original IMF members in 1945 and played a key part in its formation and became its top customers.
The Latin American Origins of Bretton Woods – Forgotten Foundations of Bretton Woods: International Development and the Making of the Postwar Order
Argentina itself, the original sterilizing central bank made into a flexible exchange rate, and probably IMF’s top customer, has gone to the Fund 22 times. Its latest program involves a 1000 percent of its quota. (Colombo/July 08/2022)