By Madhusha Thavapalakumar
Drug rehabilitation centres often see returning drug addicts, who have sobered up, quit their reliance on drugs, and left the centre, only to return a while later having relapsed and with a renewed reliance on drugs. An analogy can be drawn between this phenomenon and Sri Lanka’s relationship with the International Monetary Fund (IMF).
With 70 years of IMF membership, 16 back-to-back financial arrangements since 1965, occasional non-compliances with requirements but a history with no defaults or repayment delays, Sri Lanka undoubtedly has a long-standing, financially codependent relationship with the IMF.
Reaching out to the IMF for another financial arrangement soon after the expiry of the previous arrangement, has become a toxic trait of consecutive governments of Sri Lanka, amidst the absence of sound fiscal management policies and despite election manifestos of leaders painting a rosier picture. With the new, strong Government in place, it is almost certain that another IMF arrangement will be in place soon for Sri Lanka.
This week, The Sunday Morning Business decided to take a look at Sri Lanka’s past arrangements with the IMF, reasons as to why one arrangement leads to another, and economists’ opinions on what can be done to ensure that there is no going back, at least soon after the end of an arrangement.
70 years of togetherness
Sri Lanka joined the IMF on 29 August 1950, two years after gaining Independence and became the 50th member country of the organisation. Sri Lanka has Special Drawing Rights (SDR) of 0.34 million, a SDR quota of 578.8 million, and its outstanding purchases and loans as of 31 March 2020 was 952.23 million, according to the IMF.
The SDR is an international reserve asset created by the IMF in 1969 to supplement its member countries’ official reserves. The value of the SDR is based on a basket of five currencies: the US dollar, the euro, the Chinese renminbi, the Japanese yen, and the British sterling pound. So far, SDR of 204.2 billion (equivalent to about $ 281 billion) have been allocated to members, including the SDR of 182.6 billion allocated in 2009 in the wake of the global financial crisis.
16 arrangements and counting
So far, Sri Lanka has had 16 arrangements with the IMF, out of which 10 are Standby Arrangements (SBAs). A SBA by the IMF allows the Fund to respond flexibly to countries’ external financing needs and support their adjustment policies with short-term financing; it typically covers a period of 12–24 months, but no more than 36 months.
Two back-to-back SBAs
Sri Lanka’s first financial arrangement was a SBA of $ 30 million from 15 June 1965 to 14 June 1966. Nevertheless, Sri Lanka drew only 75% of the agreed allocation. During this period, the Opposition (United National Party [UNP]) won elections and was attempting to reverse socialism.
The first SBA was followed by another SBA, a day after the expiry of the previous SBA (15 June 1966). It was a 12-month arrangement of $ 25 million, that expired on 14 June 1967. Unlike the previous SBA, Sri Lanka was able to withdraw the entire agreed amount of $ 25 million.
Three SBAs in four years; five arrangements so far
With a break of less than a year, Sri Lanka reached out to the IMF for another SBA of $ 20 million for 14 months. The arrangement was made on 6 March 1968 and expired on 5 May 1969. Three months after the expiry, Sri Lanka turned to the IMF once again for a SBA arrangement of $ 20 million, for a period of 12 months on 12 August 1969, and this expired on 11 August 1970. During this period, Srimavo Bandaranaike returned to power and extended the nationalisation programme.
A little over six months from the expiration of the previous SBA, another SBA of $ 25 million was provided by the IMF on 18 March 1971, which reached maturity on 17 March 1972. In 1972, Ceylon became a republic and changed its name to Sri Lanka.
In all these instances, Sri Lanka managed to comply with the IMF’s regulations and withdrew 100% of the allocated funds.
In the early 1970s, import controls were brought in to manage external sector performance of Sri Lanka. Nevertheless, international oil prices were increasing sharply which had a negative impact on external sector performance during 1973. Sri Lanka’s economy grew by 2.4% and exports grew by 3% during the period from 1971 to 1973, while imports grew by 2.1% during the same period. Inflation was 6.2%. Tax revenue as a percentage of the Gross Domestic Product (GDP) was 17.5%, while capital and current expenditures were 6.3% and 21.5%, respectively. Fiscal balance was a negative 6.2%.
Sixth and seventh arrangements
After a break of two years, Sri Lanka’s six SBAs of $ 30 million were arranged by the IMF on 30 April 1974, which reached expiration in 12 months. Nevertheless, this SBA was not a successful one as Sri Lanka managed to withdraw only 29% of the allocated funds.
Meanwhile, during the period from 1974 to 1976, the economy grew by 3%; exports recorded a growth of 16.3% while imports overtook the growth of exports and recorded 21% growth during the same period. Inflation was 6.7%. Tax revenue as a percentage of GDP was 16.2%, while capital and current expenditures were 7.8% and 18.9%, respectively.
A little over two years after this arrangement, Sri Lanka had its biggest SBA of $ 112 million on 2 December 1977. The 12-month facility expired on 1 December 1978 and this time Sri Lanka withdrew 100% of the allocated funds.
However, increased tensions in Tamil-dominated areas in the north and the east led to the formation of the Liberation Tigers of Tamil Eelam (LTTE) in 1977. The year 1977 was a remarkable year as anti-Tamil protests were launched, in which over 100 people were killed. This caused volatility in the Sri Lankan economy in the third quarter of the year. The following year, the Tamil United Liberation Front won all seats in the Tamil-dominated area. Nevertheless, in 1977, Sri Lanka achieved a surplus in current accounts led by a temporary rise in international tea prices.
In 1977, the economy grew by 4%; exports grew by a significant 37.3% while imports grew only by 12.9%, and tax revenue as a percentage of GDP was 15.1%. Inflation was 1.2%. During the period from 1970 to 1977, remittances as a percentage of GDP was zero while Foreign Direct Investments (FDIs) recorded a negative growth, but picked up by 3.5% in 1977. The following year, Sri Lanka’s economy was opened, creating more space for economic growth.
From SBA to EFF
The eighth arrangement of Sri Lanka with the IMF was immediately after the previous largest SBA arrangement of $ 112 million, but this time the arrangement was an Extended Fund Facility (EFF). According to the IMF, when a country faces serious medium-term balance of payments (BOP) problems due to structural weaknesses that require time to be addressed, the IMF can assist through an EFF. Compared to the assistance provided under the SBA, assistance under an EFF features longer programme engagement to help countries implement medium-term structural reforms and a longer repayment period.
EFFs are typically approved for a period of three years, but may be approved for periods as long as four years to implement deep and sustained structural reforms. Amounts drawn under an EFF are to be repaid over 4.5-10 years in 12 equal, semiannual instalments. By contrast, credits under a SBA are repaid over 3.5-5 years.
The EFF of $ 336 million was arranged on 1 January 1979 and it expired on 31 December 1981. 100% of the funds were withdrawn. By 1980, the fiscal deficit had shot up to a peak of 19.2% of GDP with annual inflation spiralling to over 26%.
A second oil price shock in 1979 further deteriorated the balance of trade, with the current account deficit posting its worst-ever performance at over 16% of GDP in 1980. Sri Lanka continued to run a high trade deficit, with earnings from worker remittances helping to narrow the current account imbalances.
Ninth arrangement
The ninth arrangement was a SBA of $ 105 million which began on 14 September 1983 and expired on 31 July 1984. This is an example of another not-so-successful SBA of Sri Lanka with the IMF, as Sri Lanka withdrew only 50% of the allocated funds.
During this period, in 1983, what the LTTE called the “First Eelam War” started. The LTTE killed 13 soldiers in July 1983, triggering racial riots in Colombo, referred to as Black July. Riots that spanned over seven days destroyed thousands of shops and houses, forcing many people to go homeless. The economic cost of the riots was estimated to be $ 300 million.
The first SAF
The 10th arrangement was a Structural Adjustment Facility (SAF). The SAF was set up in 1986 and soon replaced by the Enhanced Structural Adjustment Facility (ESAF). Under this assistance, an eligible country could borrow up to a maximum of 140% of its IMF quota under a three-year arrangement, although this limit could be increased under exceptional circumstances to a maximum of 185% of quota.
Loans under the ESAF carried an annual interest rate of 0.5%, with repayments made semi-annually beginning at five-and-half years and ending 10 years after the disbursement. The ESAF was replaced by the Poverty Reduction and Growth Facility (PRGF) in November 1999.
The SAF Sri Lanka obtained was a three-year facility of $ 214 million and it expired on 8 March 1991. During the period of this programme, the Second Eelam War began where thousands of Muslims were expelled from the northern part of the country. A suspected LTTE suicide bomber killed former Indian Prime Minister Rajiv Gandhi in Southern India during the same year, creating tension between the countries.
Nevertheless, the failure of this SAF programme was partly due to an ambitious national poverty alleviation programme, “Janasaviya”, launched in 1989. It was viewed as a means of mobilising support for the Government's broader reform initiatives but went against typical IMF fiscal consolidation efforts.
Enter the ECF
Sri Lanka’s first Extended Credit Facility (ECF) programme with the IMF began the same year of the SAF expiration. According to the IMF, the ECF provides financial assistance to countries with protracted BOP problems.
The ECF was created under the Poverty Reduction and Growth Trust (PRGT) as part of a broader reform to make the Fund’s financial support more flexible and better tailored to the diverse needs of low-income countries (LICs), including times of crisis. The ECF was $ 455 million but only 83% of the funds were withdrawn by Sri Lanka. The programme began on 13 September 1991 and expired on 13 July 1995. During this period, President Premadasa was killed in a LTTE attack in 1993 and Chandrika Kumaratunga came into power in 1994, pledging to end the war. Thus, peace talks with the LTTE began.
Back to SBA
After a break of almost six years, Sri Lanka turned towards the IMF once again for a SBA of $ 254 million. During this six-year gap, the Civil War reached its peak as the Temple of the Tooth Relic came under an LTTE attack. Further, Chandrika Kumaratunga was wounded in another LTTE attack and Sri Lanka’s international airport was bombed, destroying most of the SriLankan fleet. The economy was going through a tough time.
The SBA began on 20 April 2001 and expired on 19 September 2002. In January 2001, Sri Lanka moved to a floating exchange rate as it was a requirement of the IMF before providing an SBA. In 2001, for the first time since Independence, GDP growth entered negative territory and GDP contracted by 1.5%.
14th and 15th
The following year, Sri Lanka had an EFF of $ 198 million for three years and another ECF of $ 368 million for three years with the IMF. The programmes expired on 17 April 2006 and Sri Lanka managed to withdraw only 14% of the agreed allocation under both arrangements. During this period, Sri Lanka faced the worst flood in May 2003 which took over-2,000 lives, made 4,000 homeless, and caused a severe blow to the economy.
In December 2004, 40,000 lives were taken away by the Boxing Day Tsunami and the livelihoods of thousands of people were put in trouble as businesses were heavily disrupted in the south coastal line of Sri Lanka.
Nevertheless, public investment increased sharply in 2005 in response to Sri Lanka’s efforts to rebuild, following the devastating impact of the Tsunami in December 2004. Government investments began to pick up and the overall fiscal deficit improved progressively from 10.4% of GDP in 2001, to 6.9% of GDP by 2007. However, Sri Lanka’s revenue mobilisation became weak during this period as the tax share of GDP continued to slide.
The 15th arrangement of Sri Lanka with the IMF was a SBA and it is the highest financial arrangement Sri Lanka had with the IMF. The three-year SBA was $ 2.56 billion which was reached right after the end of the Civil War in 2009, and it reached its expiry on 23 July 2012. This facility was reportedly obtained particularly as the global financial crisis had a serious impact on Sri Lanka.
Although the end of the Civil War in May 2009 has led to a surge in market optimism and a rebound in capital inflows, international reserves remained at low levels. Sri Lanka withdrew 100% of the funds under this facility.
The last arrangement Sri Lanka had with the IMF was an EFF of $ 1.5 billion which began on 3 June 2016 and ended on 2 June 2019. Only 67% of the agreed funds were withdrawn by Sri Lanka under this facility. As desired by the IMF’s revenue-based fiscal consolidation process, the tax revenue to GDP ratio has increased from 10.1% in 2014 to 12.5% in 2017. Nevertheless, the current Government soon after assuming office, announced significant tax cuts, slashing the Government’s tax revenue considerably.
Two months before the expiry, Sri Lanka faced deadly terror attacks on Easter Sunday on 21 April 2019, which impacted Sri Lanka’s tourism and hotel businesses.
Economy during these 55 years
In an Asian Development Bank (ADB) working paper series under the title “Sri Lanka’s Macroeconomic Challenges: A Tale of Two Deficits”, done by Institute of Policy Studies (IPS) Executive Director Dr. Dushni Weerakoon, ADB South Asia Department Senior Country Economist Utsav Kumar, and ADB consultant Roselle Dime, it was mentioned that Sri Lanka has suffered BOP crises at regular intervals, with the exception of a nine-year period from 1992 to 2000.
“Sri Lanka’s economy demonstrates a high degree of macroeconomic volatility, evidenced by its frequent BOP crises. Despite their related conditionalities on structural reforms, past fiscal and external sector consolidation and reforms have failed to take root, as demonstrated by regular bailout programmes with the IMF,” the working paper series read.
Since the 1970s, Sri Lanka’s trajectory of fiscal and current account deficits and the implicit imbalances in macroeconomic fundamentals producing twin deficits have seen the country undergo periodic economic crises that have necessitated intervention from the IMF in its role as the lender of last resort. Sri Lanka has been under multiple IMF programmes for macroeconomic stabilisation and BOP support since the 1970s – 11 arrangements in 46 years during 1971–2016 (March), the paper added.
For the most part, the IMF programmes helped stabilise both the domestic and external sectors and boost growth, but as a short-term measure only. They did not deliver deep reforms on the fiscal front and any progress made tended to be undermined in election-related cycles of spending.
Economists’ view
Speaking to The Sunday Morning Business, former Central Bank Governor Dr. W.A. Wijewardena stated that Sri Lanka inherited a whopping forein exchange reserve which was sufficient to cover 17 months of imports, but when Sri Lankans came into power, they wasted it recklessly, bringing it to cover less than one month of imports by the 1960s.
“Ever since, to protect the Sri Lankan rupee, we have to get the support of the IMF. Today the situation is much worse,” Dr. Wijewardena added.
Meanwhile, Advocata Institute Chief Operating Officer and Founding Member Dhananath Fernando stated that when the country has a budget deficit and external debt to settle, but lacks foreign exchange earnings, Sri Lanka has to go back to the IMF.
“Going to the IMF shows that our public finances have been constantly poor,” Fernando added.
Fernando suggested that the Government focus on long-term foreign exchange earning methods instead of focusing on short-term tangible measures such as building bridges, airports, and ports that could get leaders some support from the public. As a result, long-term measures that could derive massive benefits for the country are being postponed every time.
He stated that the Government should create an ecosystem to increase exports, in which high-tech machinery are used to diversify Sri Lanka’s export basket through value addition with the support from a sound labour force.
“The export basket has been the same for the past couple of decades. We have been talking of it about a million times but nothing has been changed. We are exporting simple agricultural items mostly. This is not adequate, this has to be advanced. The quality has to be improved,” he added.
Meanwhile, emphasising the importance of introducing the necessary reforms and saving foreign exchange reserves, Dr. Wijewardena added that Sri Lanka should have the courage to cut out unnecessary foreign exchange expenditure.
“For instance, Sri Lanka does not have the luxury to give duty-free car permits. We have been borrowing from the IMF, the World Bank, and other forces, giving all kinds of handouts to politicians and public servants, without getting a commitment from them to work hard. Without foreign exchange earnings, how can a country afford to give duty-free car permits?” Dr. Wijewardena questioned.
Taking Singapore as an example, he added that from the beginning Singapore never wanted to hand out anything free to please anyone, and if anyone requires better public service they are ready to pay for it in Singapore. He recommended that a similar policy be followed in Sri Lanka.
Based on the research and comments obtained for this article, it is evident that Sri Lanka needs strong fiscal policies supported by reforms to generate non-debt-creating foreign currency inflows that could stabilise the external sector and help the country in servicing the existing external payments, while building up a buffer stock of official reserves, at least close to what we had right after Independence. Sri Lanka & IMF: The relapsing addict and the rehabilitation centre
09 Aug 2020
Sri Lanka & IMF: The relapsing addict and the rehabilitation centre
09 Aug 2020
By Madhusha Thavapalakumar
Drug rehabilitation centres often see returning drug addicts, who have sobered up, quit their reliance on drugs, and left the centre, only to return a while later having relapsed and with a renewed reliance on drugs. An analogy can be drawn between this phenomenon and Sri Lanka’s relationship with the International Monetary Fund (IMF).
With 70 years of IMF membership, 16 back-to-back financial arrangements since 1965, occasional non-compliances with requirements but a history with no defaults or repayment delays, Sri Lanka undoubtedly has a long-standing, financially codependent relationship with the IMF.
Reaching out to the IMF for another financial arrangement soon after the expiry of the previous arrangement, has become a toxic trait of consecutive governments of Sri Lanka, amidst the absence of sound fiscal management policies and despite election manifestos of leaders painting a rosier picture. With the new, strong Government in place, it is almost certain that another IMF arrangement will be in place soon for Sri Lanka.
This week, The Sunday Morning Business decided to take a look at Sri Lanka’s past arrangements with the IMF, reasons as to why one arrangement leads to another, and economists’ opinions on what can be done to ensure that there is no going back, at least soon after the end of an arrangement.
70 years of togetherness
Sri Lanka joined the IMF on 29 August 1950, two years after gaining Independence and became the 50th member country of the organisation. Sri Lanka has Special Drawing Rights (SDR) of 0.34 million, a SDR quota of 578.8 million, and its outstanding purchases and loans as of 31 March 2020 was 952.23 million, according to the IMF.
The SDR is an international reserve asset created by the IMF in 1969 to supplement its member countries’ official reserves. The value of the SDR is based on a basket of five currencies: the US dollar, the euro, the Chinese renminbi, the Japanese yen, and the British sterling pound. So far, SDR of 204.2 billion (equivalent to about $ 281 billion) have been allocated to members, including the SDR of 182.6 billion allocated in 2009 in the wake of the global financial crisis.
16 arrangements and counting
So far, Sri Lanka has had 16 arrangements with the IMF, out of which 10 are Standby Arrangements (SBAs). A SBA by the IMF allows the Fund to respond flexibly to countries’ external financing needs and support their adjustment policies with short-term financing; it typically covers a period of 12–24 months, but no more than 36 months.
Two back-to-back SBAs
Sri Lanka’s first financial arrangement was a SBA of $ 30 million from 15 June 1965 to 14 June 1966. Nevertheless, Sri Lanka drew only 75% of the agreed allocation. During this period, the Opposition (United National Party [UNP]) won elections and was attempting to reverse socialism.
The first SBA was followed by another SBA, a day after the expiry of the previous SBA (15 June 1966). It was a 12-month arrangement of $ 25 million, that expired on 14 June 1967. Unlike the previous SBA, Sri Lanka was able to withdraw the entire agreed amount of $ 25 million.
Three SBAs in four years; five arrangements so far
With a break of less than a year, Sri Lanka reached out to the IMF for another SBA of $ 20 million for 14 months. The arrangement was made on 6 March 1968 and expired on 5 May 1969. Three months after the expiry, Sri Lanka turned to the IMF once again for a SBA arrangement of $ 20 million, for a period of 12 months on 12 August 1969, and this expired on 11 August 1970. During this period, Srimavo Bandaranaike returned to power and extended the nationalisation programme.
A little over six months from the expiration of the previous SBA, another SBA of $ 25 million was provided by the IMF on 18 March 1971, which reached maturity on 17 March 1972. In 1972, Ceylon became a republic and changed its name to Sri Lanka.
In all these instances, Sri Lanka managed to comply with the IMF’s regulations and withdrew 100% of the allocated funds.
In the early 1970s, import controls were brought in to manage external sector performance of Sri Lanka. Nevertheless, international oil prices were increasing sharply which had a negative impact on external sector performance during 1973. Sri Lanka’s economy grew by 2.4% and exports grew by 3% during the period from 1971 to 1973, while imports grew by 2.1% during the same period. Inflation was 6.2%. Tax revenue as a percentage of the Gross Domestic Product (GDP) was 17.5%, while capital and current expenditures were 6.3% and 21.5%, respectively. Fiscal balance was a negative 6.2%.
Sixth and seventh arrangements
After a break of two years, Sri Lanka’s six SBAs of $ 30 million were arranged by the IMF on 30 April 1974, which reached expiration in 12 months. Nevertheless, this SBA was not a successful one as Sri Lanka managed to withdraw only 29% of the allocated funds.
Meanwhile, during the period from 1974 to 1976, the economy grew by 3%; exports recorded a growth of 16.3% while imports overtook the growth of exports and recorded 21% growth during the same period. Inflation was 6.7%. Tax revenue as a percentage of GDP was 16.2%, while capital and current expenditures were 7.8% and 18.9%, respectively.
A little over two years after this arrangement, Sri Lanka had its biggest SBA of $ 112 million on 2 December 1977. The 12-month facility expired on 1 December 1978 and this time Sri Lanka withdrew 100% of the allocated funds.
However, increased tensions in Tamil-dominated areas in the north and the east led to the formation of the Liberation Tigers of Tamil Eelam (LTTE) in 1977. The year 1977 was a remarkable year as anti-Tamil protests were launched, in which over 100 people were killed. This caused volatility in the Sri Lankan economy in the third quarter of the year. The following year, the Tamil United Liberation Front won all seats in the Tamil-dominated area. Nevertheless, in 1977, Sri Lanka achieved a surplus in current accounts led by a temporary rise in international tea prices.
In 1977, the economy grew by 4%; exports grew by a significant 37.3% while imports grew only by 12.9%, and tax revenue as a percentage of GDP was 15.1%. Inflation was 1.2%. During the period from 1970 to 1977, remittances as a percentage of GDP was zero while Foreign Direct Investments (FDIs) recorded a negative growth, but picked up by 3.5% in 1977. The following year, Sri Lanka’s economy was opened, creating more space for economic growth.
From SBA to EFF
The eighth arrangement of Sri Lanka with the IMF was immediately after the previous largest SBA arrangement of $ 112 million, but this time the arrangement was an Extended Fund Facility (EFF). According to the IMF, when a country faces serious medium-term balance of payments (BOP) problems due to structural weaknesses that require time to be addressed, the IMF can assist through an EFF. Compared to the assistance provided under the SBA, assistance under an EFF features longer programme engagement to help countries implement medium-term structural reforms and a longer repayment period.
EFFs are typically approved for a period of three years, but may be approved for periods as long as four years to implement deep and sustained structural reforms. Amounts drawn under an EFF are to be repaid over 4.5-10 years in 12 equal, semiannual instalments. By contrast, credits under a SBA are repaid over 3.5-5 years.
The EFF of $ 336 million was arranged on 1 January 1979 and it expired on 31 December 1981. 100% of the funds were withdrawn. By 1980, the fiscal deficit had shot up to a peak of 19.2% of GDP with annual inflation spiralling to over 26%.
A second oil price shock in 1979 further deteriorated the balance of trade, with the current account deficit posting its worst-ever performance at over 16% of GDP in 1980. Sri Lanka continued to run a high trade deficit, with earnings from worker remittances helping to narrow the current account imbalances.
Ninth arrangement
The ninth arrangement was a SBA of $ 105 million which began on 14 September 1983 and expired on 31 July 1984. This is an example of another not-so-successful SBA of Sri Lanka with the IMF, as Sri Lanka withdrew only 50% of the allocated funds.
During this period, in 1983, what the LTTE called the “First Eelam War” started. The LTTE killed 13 soldiers in July 1983, triggering racial riots in Colombo, referred to as Black July. Riots that spanned over seven days destroyed thousands of shops and houses, forcing many people to go homeless. The economic cost of the riots was estimated to be $ 300 million.
The first SAF
The 10th arrangement was a Structural Adjustment Facility (SAF). The SAF was set up in 1986 and soon replaced by the Enhanced Structural Adjustment Facility (ESAF). Under this assistance, an eligible country could borrow up to a maximum of 140% of its IMF quota under a three-year arrangement, although this limit could be increased under exceptional circumstances to a maximum of 185% of quota.
Loans under the ESAF carried an annual interest rate of 0.5%, with repayments made semi-annually beginning at five-and-half years and ending 10 years after the disbursement. The ESAF was replaced by the Poverty Reduction and Growth Facility (PRGF) in November 1999.
The SAF Sri Lanka obtained was a three-year facility of $ 214 million and it expired on 8 March 1991. During the period of this programme, the Second Eelam War began where thousands of Muslims were expelled from the northern part of the country. A suspected LTTE suicide bomber killed former Indian Prime Minister Rajiv Gandhi in Southern India during the same year, creating tension between the countries.
Nevertheless, the failure of this SAF programme was partly due to an ambitious national poverty alleviation programme, “Janasaviya”, launched in 1989. It was viewed as a means of mobilising support for the Government's broader reform initiatives but went against typical IMF fiscal consolidation efforts.
Enter the ECF
Sri Lanka’s first Extended Credit Facility (ECF) programme with the IMF began the same year of the SAF expiration. According to the IMF, the ECF provides financial assistance to countries with protracted BOP problems.
The ECF was created under the Poverty Reduction and Growth Trust (PRGT) as part of a broader reform to make the Fund’s financial support more flexible and better tailored to the diverse needs of low-income countries (LICs), including times of crisis. The ECF was $ 455 million but only 83% of the funds were withdrawn by Sri Lanka. The programme began on 13 September 1991 and expired on 13 July 1995. During this period, President Premadasa was killed in a LTTE attack in 1993 and Chandrika Kumaratunga came into power in 1994, pledging to end the war. Thus, peace talks with the LTTE began.
Back to SBA
After a break of almost six years, Sri Lanka turned towards the IMF once again for a SBA of $ 254 million. During this six-year gap, the Civil War reached its peak as the Temple of the Tooth Relic came under an LTTE attack. Further, Chandrika Kumaratunga was wounded in another LTTE attack and Sri Lanka’s international airport was bombed, destroying most of the SriLankan fleet. The economy was going through a tough time.
The SBA began on 20 April 2001 and expired on 19 September 2002. In January 2001, Sri Lanka moved to a floating exchange rate as it was a requirement of the IMF before providing an SBA. In 2001, for the first time since Independence, GDP growth entered negative territory and GDP contracted by 1.5%.
14th and 15th
The following year, Sri Lanka had an EFF of $ 198 million for three years and another ECF of $ 368 million for three years with the IMF. The programmes expired on 17 April 2006 and Sri Lanka managed to withdraw only 14% of the agreed allocation under both arrangements. During this period, Sri Lanka faced the worst flood in May 2003 which took over-2,000 lives, made 4,000 homeless, and caused a severe blow to the economy.
In December 2004, 40,000 lives were taken away by the Boxing Day Tsunami and the livelihoods of thousands of people were put in trouble as businesses were heavily disrupted in the south coastal line of Sri Lanka.
Nevertheless, public investment increased sharply in 2005 in response to Sri Lanka’s efforts to rebuild, following the devastating impact of the Tsunami in December 2004. Government investments began to pick up and the overall fiscal deficit improved progressively from 10.4% of GDP in 2001, to 6.9% of GDP by 2007. However, Sri Lanka’s revenue mobilisation became weak during this period as the tax share of GDP continued to slide.
The 15th arrangement of Sri Lanka with the IMF was a SBA and it is the highest financial arrangement Sri Lanka had with the IMF. The three-year SBA was $ 2.56 billion which was reached right after the end of the Civil War in 2009, and it reached its expiry on 23 July 2012. This facility was reportedly obtained particularly as the global financial crisis had a serious impact on Sri Lanka.
Although the end of the Civil War in May 2009 has led to a surge in market optimism and a rebound in capital inflows, international reserves remained at low levels. Sri Lanka withdrew 100% of the funds under this facility.
The last arrangement Sri Lanka had with the IMF was an EFF of $ 1.5 billion which began on 3 June 2016 and ended on 2 June 2019. Only 67% of the agreed funds were withdrawn by Sri Lanka under this facility. As desired by the IMF’s revenue-based fiscal consolidation process, the tax revenue to GDP ratio has increased from 10.1% in 2014 to 12.5% in 2017. Nevertheless, the current Government soon after assuming office, announced significant tax cuts, slashing the Government’s tax revenue considerably.
Two months before the expiry, Sri Lanka faced deadly terror attacks on Easter Sunday on 21 April 2019, which impacted Sri Lanka’s tourism and hotel businesses.
Economy during these 55 years
In an Asian Development Bank (ADB) working paper series under the title “Sri Lanka’s Macroeconomic Challenges: A Tale of Two Deficits”, done by Institute of Policy Studies (IPS) Executive Director Dr. Dushni Weerakoon, ADB South Asia Department Senior Country Economist Utsav Kumar, and ADB consultant Roselle Dime, it was mentioned that Sri Lanka has suffered BOP crises at regular intervals, with the exception of a nine-year period from 1992 to 2000.
“Sri Lanka’s economy demonstrates a high degree of macroeconomic volatility, evidenced by its frequent BOP crises. Despite their related conditionalities on structural reforms, past fiscal and external sector consolidation and reforms have failed to take root, as demonstrated by regular bailout programmes with the IMF,” the working paper series read.
Since the 1970s, Sri Lanka’s trajectory of fiscal and current account deficits and the implicit imbalances in macroeconomic fundamentals producing twin deficits have seen the country undergo periodic economic crises that have necessitated intervention from the IMF in its role as the lender of last resort. Sri Lanka has been under multiple IMF programmes for macroeconomic stabilisation and BOP support since the 1970s – 11 arrangements in 46 years during 1971–2016 (March), the paper added.
For the most part, the IMF programmes helped stabilise both the domestic and external sectors and boost growth, but as a short-term measure only. They did not deliver deep reforms on the fiscal front and any progress made tended to be undermined in election-related cycles of spending.
Economists’ view
Speaking to The Sunday Morning Business, former Central Bank Governor Dr. W.A. Wijewardena stated that Sri Lanka inherited a whopping forein exchange reserve which was sufficient to cover 17 months of imports, but when Sri Lankans came into power, they wasted it recklessly, bringing it to cover less than one month of imports by the 1960s.
“Ever since, to protect the Sri Lankan rupee, we have to get the support of the IMF. Today the situation is much worse,” Dr. Wijewardena added.
Meanwhile, Advocata Institute Chief Operating Officer and Founding Member Dhananath Fernando stated that when the country has a budget deficit and external debt to settle, but lacks foreign exchange earnings, Sri Lanka has to go back to the IMF.
“Going to the IMF shows that our public finances have been constantly poor,” Fernando added.
Fernando suggested that the Government focus on long-term foreign exchange earning methods instead of focusing on short-term tangible measures such as building bridges, airports, and ports that could get leaders some support from the public. As a result, long-term measures that could derive massive benefits for the country are being postponed every time.
He stated that the Government should create an ecosystem to increase exports, in which high-tech machinery are used to diversify Sri Lanka’s export basket through value addition with the support from a sound labour force.
“The export basket has been the same for the past couple of decades. We have been talking of it about a million times but nothing has been changed. We are exporting simple agricultural items mostly. This is not adequate, this has to be advanced. The quality has to be improved,” he added.
Meanwhile, emphasising the importance of introducing the necessary reforms and saving foreign exchange reserves, Dr. Wijewardena added that Sri Lanka should have the courage to cut out unnecessary foreign exchange expenditure.
“For instance, Sri Lanka does not have the luxury to give duty-free car permits. We have been borrowing from the IMF, the World Bank, and other forces, giving all kinds of handouts to politicians and public servants, without getting a commitment from them to work hard. Without foreign exchange earnings, how can a country afford to give duty-free car permits?” Dr. Wijewardena questioned.
Taking Singapore as an example, he added that from the beginning Singapore never wanted to hand out anything free to please anyone, and if anyone requires better public service they are ready to pay for it in Singapore. He recommended that a similar policy be followed in Sri Lanka.
Based on the research and comments obtained for this article, it is evident that Sri Lanka needs strong fiscal policies supported by reforms to generate non-debt-creating foreign currency inflows that could stabilise the external sector and help the country in servicing the existing external payments, while building up a buffer stock of official reserves, at least close to what we had right after Independence. Kapruka
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