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Tuesday, June 18, 2024

IMF deal: Facts behind the hype

Charith Gunawardena.

The IMF Board approved a 48-month extended arrangement under the Extended Fund Facility (EFF) of SDR 2.286 billion (about $ 3 billion) to support Sri Lanka’s economic policies and reforms. The Sri Lanka Government and business elite have welcomed the approval of the 17th IMF program, despite the failures of every one of the previous deals and the negative impact they had on the poor and vulnerable people of the country.

Kristalina Georgieva, the Managing Director of the IMF issued a press release on 20 March stating:

“The objectives of the EFF-supported program are to restore macroeconomic stability and debt sustainability, safeguarding financial stability, and stepping up structural reforms to unlock Sri Lanka’s growth potential. All program measures are mindful of the need to protect the most vulnerable and improving governance.

Close collaboration between Sri Lanka and all its creditors will be critical to expedite a debt treatment that will restore debt sustainability consistent with program parameters.”
The IMF correctly claims that the Sri Lankan economy is facing significant challenges stemming from pre-existing vulnerabilities and policy missteps in the lead up to the crisis. Rampant corruption, poor governance and mismanagement are also significant contributors to the nation’s plight.

Bretton Woods system

What the IMF fails to highlight is how Sri Lanka’s catastrophic economic and humanitarian crisis has been aggravated by the ongoing Bretton Woods economic system of monetary management. The World Bank (WB), International Monetary Fund (IMF) and the global rules for commercial and financial relations were established in 1944 under this system.

While these rules were presented as an apolitical effort to rebuild the world economy, many countries in the global south view them as an effort to defend or expand the reach of Europe, and to promote US interests in particular, to this day.

Extensive academic literature, challenges the robustness of the theoretical and evidence bases for World Bank and IMF principles and policies. Together they suggest that World Bank and IMF policies have failed to achieve their stated objectives and instead support an economic order that benefits elites and private sector interests at the expense of poor and marginalised communities.

Some of the most common criticisms of the World Bank and IMF identified by a UK based campaign group Bretton Woods Project, is its records on:

  • Democratic governance (Structural under-representation of the Global South, Undermining democratic ownership, Biased and inconsistent decision-making, Weak ability to learn from past mistakes, Effective impunity for harms caused.)
  • Human rights (Restricting the macroeconomic environment for human rights, Causing major harms through development projects, Lacking evidence for positive impacts while not measuring harmful impacts.)
  • Environment (Growth-based model unsustainable, Continued fossil fuel investments, Focus on mega-projects, Deforestation)

Shortcomings of the IMF-EFF

In the context of Bretton Woods system’s shortcomings, the statement by Kristalina Georgieva should concern citizens of Sri Lanka due to its failure to place the wellbeing of people and environment at the heart of its policy objectives. The IMF still fails to recognise that simply restoring macroeconomic stability and safeguarding financial stability in isolation does not automatically improve wellbeing. Their policies are underpinned by an ideological belief in ‘trickle-down’ economics that has brought unprecedented levels of inequality and hardships to people even in cities such as London and New York.

Although all program measures are mindful of the need to protect the most vulnerable, they lack ambition or commitment to tackle low wages, long hours, precarious work and extortionate living costs. IMF demands for stepping up structural reforms to unlock Sri Lanka’s growth potential shows once again its inability to learn from past mistakes. The austerity program undertaken by the Government under the cover of IMF negotiations is having a devastating impact on children, women, the elderly and those who are disabled.

IMF’s Debt Sustainability Analysis on Sri Lanka remained closed to public scrutiny until the agreement was approved. A further lack of transparency on the conditions imposed on the Government is a further cause of concern. Government commitments to transparently achieve a debt resolution, consistent with the program parameters and equitable burden sharing among creditors has little legitimacy without a people’s mandate to govern. The interests of overseas private creditors who have provided debts at predatory interest rates to members of this same Government responsible for mismanagement, should not be placed ahead of the ordinary people of Sri Lanka.

Inadequate measures are being taken to tackle corruption or holding those responsible for previous irregularities to account. The ongoing efforts to tackle corruption is insufficient. A comprehensive anti-corruption reform agenda with clear actions and timelines has still not been published by the Government. Neither has the IMF meaningfully elaborated or quantified on what it means by ‘reducing corruption vulnerabilities’ stated in its latest staff report. Its objectives are ambiguous and insufficient to have the necessary impact (to improve governance by identifying specific priority reforms; to strengthen the asset declaration system and the independence of the Commission to Investigate Allegations of Bribery or Corruption; to reduce opportunities for corruption by expanding the reliance on digitalisation in areas such as revenue administration and procurement).

Institutional reforms, globally

Institutions and governance frameworks require comprehensive reforms. In depth reforms are also necessary at a global level. Sri Lanka has failed to have hidden stolen assets recovered from off-shore accounts or from those sitting in the global north. Illicit financial outflows through mis-invoicing continues into the international banking system denying the country essential foreign exchange.

The World Bank and IMF have failed to publish any impact assessments on countries of the global south, resulted from the large scale fiscal stimulus programs undertaken in the Global North. Despite the increased money supply of global reserve currencies, multilateral institutions remain underfunded. The excess volumes of newly ‘printed’ money eventually ends up in the hands of hedge funds, private equity firms or the commercial money markets. The existing system is designed to ensure that many poor countries borrow money from commercial money markets, an idea that has been ‘legitimised’ through financialisation of the global economy. Half of Sri Lanka’s sovereign debts are to private creditors.

Sri Lanka is not operating on a level playing field and the IMF is not helping to change it.

Navigating imperfections of the global economic order

Sri Lanka first requires extensive reforms to its political culture, while protecting democracy and human rights. It must work towards meritocracy, pragmatism and honesty to improve economic, social and environmental outcomes of its people. Law and order should apply to every citizen equally. Political interference in public institutions should cease. An urgent solution is required to unite communities with a fair resolution to the ethnic problem. Rampant corruption has to be eliminated starting by holding those to account for past scandals.

The country should take a non-aligned position in geopolitical battles, develop a clear industrial strategy and be one where it is easy to do business.

Sri Lanka therefore needs a government with a clear mandate from its people to navigate the imperfections of the global economic system.

Only then would Sri Lanka be able to fully engage with the world but protect itself against major excesses of the unjust global economic order and become a country that provides care, order, security and certainty to its people.

(The writer is a former elected Local Councillor for London Borough of Enfield in the United Kingdom and a member of the Sri Lankan diaspora and could be reached via email [email protected].)


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