The Politics of IMF Conditions
The IMF is back in focus for Sri Lankan economists. It had perhaps been relegated to the back ground in ongoing discussions, because the current regime has declined to meet the Fund’s conditions for some time, and had no ongoing special arrangements with it. But now there has been a turn around; at stake is a US$ 1.9 billion ‘stand by facility’ that can bolster Sri Lanka’s foreign exchange reserves that were depelted, largely due to an indefensible attempt to manage the ‘float’ of the Sri Lanka Rupee, during the first phase of the global financial crisis. As investors in rupee denominated bonds sold out, seeking dollars for the value of their fixed rate instruments in turn, the Central Bank sold dollars to them from reserves, buying back the rupee loan notes, at basically a fixed rate. Nearly a billion dollars was spent thus; if the exchange rate had been allowed to float, given the heavy demand, the dollar would have risen against the rupee. Still millions of dollars would have been used up from reserves, which we must concede were boosted by international rupee bond sales in the first place; if the market had been allowed to prevail, in relation to the exchange rate, the depreciation would have been a fraction less. Another option would have been to restrict the repatriation of foreign funds, or in other words controlling the small fraction of capital account that has already been opened, for a fixed period, say an year or two. Would we then have courted international condemnation and ostracism? Not quite, as I will underline by examining the example of Malaysia between 1998-2000, during a previous crisis.
However that comparison may be, if Sri Lanka had opted to re-regulate the capital account and forestall a sudden drain on reserves, which has led to the current crisis, it would have been too late in any event, since over spending of freshly pr(m)inted money non-productively had already led to very high rupee inflation, up to 30%, in the months preceding the crisis. This, as Harsha de Silva has been pointing out, results from a mismanagement of monetary policy (what the Central Bank does, in short hand), that has become politicized as fiscal policy (what the Treasury does, in short hand), in recent years. In fact, a devaluation of the rupee in the face of heavy, internally generated inflation didn’t take place, and hasn’t taken place, on my view, because monetary policy has been so heavily politicized. What’s happened is that the SL Rs – US dollar cross rate has become a touch stone of nationalist machismo; maintaining it or shifting it in favor of the rupee, being the measure of some kind of national manliness. This is unfortunate, but we must not forget the role politicians now in the opposition UNP, played during their brief tenure in subordinated authority, between 2002-2004. They politicized the then international weakness of the US dollar, that simply and coincidentally accompanied this period, and resultant slight movement upwards of the SL rupee – US dollar cross rate, as a symptom of superior fiscal policy. Political memories in Sri Lanka are short, and I don’t expect many to remember this. But previous UNP regimes, especially from 1989-1994 had well managed gradual devaluations, which were, arguably at least, required to keep exports competitive. Politicians would do well, I say with little hope of being heard, to refrain from attempting to politicize monetary policy.
But now reserves are depleted, and the quick fix solutions of Diaspora Bonds, have only raised some US$180 million. Capital markets for high risk emerging market debt has also dried up, because of the lack of liquidity that accompanies the current crisis, compounded by the massive borrowing on capital markets by the US and Europe, which is ongoing, and will continue as they attempt to fix massive funding short falls at home. So how should we, as ordinary but thoughtful citizens of this country, regard the conditions that will come with the IMF package?
There is a tendency I detect, especially among those in the corporate sector, who are as conscious of their location and responsibilities as nationals of this country, as I am, to view what ever conditions the Fund may impose as being beyond politics; good technocratic advise that we must take, for our own good. This is of course prompted in part by the mismanagement in a context of hyper politicization of our own monetary policy, but its also catalyzed by a view, infrequently challenged, in the English language press in this country at least, that the Bank the Fund and their allied institutions are rule-governed and ethical, non-political, technocratic and expert, almost infallible. But are they really?
Not at all. The World Bank and IMF come out of a neo-imperial arraignment through which the US and Europe still attempt to rule the world; it still goes with out saying the head of the Bank is a US citizen and head of the Fund, a European, with the US having a veto on IMF policies. And their respective Boards push for policies that will assist these national formations. Furthermore, the US itself does not subject itself to scrutiny from the IMF. Speaking recently to the Financial Times (FT), Lord Turner, head of the Financial Services Authority in the UK said: “One of the problems the IMF has had in the past is that, when it tries to issue warnings, those warnings are watered down under political pressure from large powerful countries who don't like the commentary about their financial system.” And then he went to add, “There has, for instance, never been one of the reports on the financial system that the IMF produces on the US financial system because the US didn't want there to be one." (FT (London), 10/02/2009). Hardly non-political, is it? And pause to consider how pitifully regulated and managed the US financial system has been, resulting in the current financial disaster.
But a reasonable reader may wave that way. After all that matters to us is the advice the IMF give us, s/he may say. And isn’t that advice always worthwhile? Well not always, if you step back and take a look through a historical-global frame. There are many many examples to turn to, recent as well as past, but one of the most decisive is the Malaysian example of ’98, I referred to earlier. June ’97 saw the beginnings of the East Asian financial crisis, which saw the Thai Baht plummet followed by plunges in currency values across the region, catalysed by speculative hedge funds that were shorting (that’s borrowing, and selling, profiting from declines) currency futures, and then exacerbated by quick out flows of hard currency funds invested in short term instruments. The IMF and World Bank blamed the victims, in Thailand and Indonesia for example, prescribing in general a combination of high interest rates, and cuts in government expenditure and continued depreciation of national currencies, which resulted not in quick recovery, but increased bankruptcies, and more debt. Malaysia initially followed these dictates, but on 1st Sept, 1998 announced new policies, which included, as Michael Billington recounts in a review of a book on the crisis, “currency controls on the capital account (not on the current account); demonetization of the ringgit outside of Malaysia; a one-year freeze on the repatriation of portfolio funds; pegging of the ringgit to the U.S. dollar.” (Economic Intelligence Review, 13/08/2004). Wall Street, and its institutions, which benefits a great deal managing emerging market debt and currency instruments, howled, not simply because of loss of the one market, but as always because one counter example can start a rot. But the Malaysian government stood firm. The policy worked. By the end of December 2002, the IMF conceded they had been wrong, and the Malaysian government had been right, on the currency peg (BBC News, 11/12/2002, from www.bbcnews.com). And in a tenth year assessment of the Asian crisis Nobel prize winner Joseph Stiglitz concludes that Malaysia “had the shortest and shallowest downturn of any of the afflicted countries,” because it refused IMF dictates. “When it re-emerged,” Stiglitz goes on, “it was not burdened with debt and bankrupt firms like so many of its neighbors.” (Malaysian Miracle, 2007 from www.josephstiglitz.com).
Well Sri Lanka in 2009 is not Malaysia in 1998. For one thing, our current crisis has many home grown causes, which include, as I have underlined above, an unfortunate politicization of monetary policy, which has led to an over valued currency and high inflation before the crisis. Still, bad leadership of key national institutions should not lull us into thinking that neo-imperial institutions like the Bank and the Fund, to whom we are now forced to turn, have anything but their own interests at heart.
We would do well to think things through better next time, if we survive the year ahead.