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SRI LANKA: Newly Reopened IMF Office Launches Budget Probe

Feizal Samath

COLOMBO, Oct 15 2009 (IPS) - The International Monetary Fund’s new resident representative in Sri Lankan is likely to receive his baptism of fire once he settles into his new post this week.

Newly minted IMF country representative Koshy Mathai—who arrived in this capital from Washington last weekend—will have to look into the Sri Lankan government’s decision to postpone presenting the full national budget next month to Parliament, because it has opted instead to go for a vote-on-account in view of the impending election.

Responding to an email query from IPS, an IMF official, who declined to be named, said the Fund was “looking into the implications of the government’s decision to hold a vote-on-account this year instead of the normal budget and what it might mean in the context of the IMF programme.” Mathai was unavailable for comment.

This appears to be the first order of business for the multilateral agency, which reopened this week in Sri Lanka after more than two years since it ceased its operations in the country.

The IMF is returning to the island nation with a new funding programme after closing its office in February 2007. At the time, Luis Valdivieso, the Fund’s senior resident representative for Sri Lanka, said the closure was due to budget cuts and the lack of a programme for Sri Lanka.

However, most political analysts attributed the closure to opposition posed to the Fund by President Mahinda Rajapaksa’s ruling United People’s Freedom Alliance, backed by the Marxist People’s Liberation Front (better known as JVP), which frowned on the IMF’s loan conditions like cutting the budget deficit, reducing wasteful spending and reducing the size of the state sector.

Subsequently, the government, stuck for funds and too proud to go back to the IMF for cheap credit, utilised a variety of sources to raise money for state expenditure. This included loans and credit from China, India, Libya and Iran, the sale of dollar- and rupee-denominated bonds to international markets, and overseas and local commercial borrowings—at interest rates higher than those of IMF facilities.

Earlier this year, with the global financial crisis triggering an outflow of dollar investments from Central Bank of Sri Lanka bonds, the country was struggling with depleted foreign reserves, and then the IMF came forward with a rescue package to prop up the reserves.

“We didn’t ask for the cash; the Fund offered us support,” said Central Bank Governor Ajith Nivard Cabraal when negotiations began in March. Subsequently, in July, the Fund agreed to provide a 2.6-billion U.S. dollar standby credit facility to lift foreign reserves.

The JVP, which has consistently criticised the government for resorting to IMF support, said on Tuesday that the IMF loan would lead to Sri Lanka being eternally in debt or till the year 2050.

JVP parliamentarian Sunil Handunetti, speaking on Tuesday at a seminar organised by his party on the theme ‘IMF loan and the Myth of Development’ said the country would have to start paying the loan from 2012 until 2050 and earn more than five billion U.S. dollars to pay the interest alone.

Based on documents and statistics presented at the seminar, Handunetti said that within three years since the Rajapaksa government assumed power, the country’s outstanding debt had almost doubled to 4.2 billion rupees (36 million U.S. dollars), up from 2.2 billion rupees (19 million U.S. dollars).

“Ministers say our economy is doing well. If that is the case, why do we need to borrow so much money?” he asked.

Lakshman Kiriella, a senior parliamentarian from the main opposition United National Party (UNP), reckoned that the government was “broke” and that “is why the IMF money is desperately needed.”

“The government resorted to very expensive credit from commercial borrowing sources, and now has gone to the IMF,” he said, adding that based on figures at the party’s disposal, the repayment of loans and loan installments next year would be more than income.

“From where the government is going to raise this money is the big question,” he said. Defence spending has been the single biggest cost to the government over the past three years to battle Tamil separatist guerrillas. Government troops, armed with the latest weapons and advanced technology, crushed the rebels in May. Rebel leader Velupillai Prabhakaran, for long considered invincible and unbeatable, was also killed in the fighting.

Despite the end of the fighting, defence expenditures have not gone down, since the government had wanted to expand the military and increase its presence in the Tamil-dominated north and east to ensure Tamil rebels will not resurface.

Under the IMF programme, the government has agreed to sharply cut the budget deficits to five percent of gross domestic product by 2011 from seven percent in 2009. Initiating sharp spending cuts and raising revenue through new taxes have also been proposed in the plan.

Two weeks ago, the government announced it was postponing presentation of the November budget and was instead seeking a vote-on-account (specifically, for planned spending for the months of January-March in 2010) in view of parliamentary polls scheduled before April 2010, when Parliament’s term ends. Government ministers have said that a new government must be allowed to present its own budget.

The opposition has criticised the decision, saying with elections on, any budget would have to resort to unlimited spending, which will cover the election, and renege on promises made to the IMF.

“If a budget is presented, the government won’t be able to raise revenue through new taxes or (make) cuts in welfare spending, education or health, as these would be unpopular measures ahead of elections,” said the UNP’s Kiriella. “This is why the government has opted for a vote on account.”

But government ministers have rejected the opposition claims, saying it is standard practice to postpone the budget during elections.

A private sector economist, who declined to be named, said that the government will not be able to maintain reduced spending targets in the IMF programme in view of the elections. “The second tranche of the loan is due later this month. It would be interesting to see what the IMF would do now that the budget target has become an issue,” he said.