The media is full of new reported on the IMF’s 1st review of the US$ 3 bn IMF programme held in September 14 to 27, 2023. All IMF friends and well wishers eagerly waited for the release of the 2nd tranche of US$ 330 mn immediately after this review. High expectations were based on significant national policy changes implemented by the authorities sitting at the IMF table in a short period of time from the receipt of the first tranche of US$ 333 mn immediately after the approval of the IMF programme on 20 March 2023. Under this 48-months long programme, US$ 663 mn is scheduled to receive in 2023.

Some media quoting the IMF press briefing held on 27 September reported that IMF did not reach a staff-level agreement with Sri Lanka due to a potential shortfall in government revenue generation and, therefore, 2nd tranche of about US$330m would only be released after the IMF reaches a staff-level agreement, and there was no fixed timeline for receiving it.

However, the Central Bank or Ministry of Finance was not interested in communicating any news on the outcome of the IMF review to the public although some spokesperson before commencing the review expressed positive attitudes towards receiving the second tranche.

The IMF press release dated 20 September provided some information regarding the outcome of the 1st review.

• See the press release at the link below.

https://www.imf.org/en/News/Articles/2023/09/27/pr23326-imf-staff-concludes-visit-to-sri-lanka

• View the press briefing at the link below.

https://www.imf.org/en/News/Articles/2023/09/27/tr092723-press-briefing-on-sri-lanka

Accordingly, the purpose of this short article is to provide 10 highlights of the IMF 1st review press release and 12 traits missing expectations of the IMF programme as revealed from the press release on the stabilization and recovery of Sri Lankan economy from its historic crisis.

The target group of this article is the professionals who are familiar with macroeconomic management policies and IMF programmes.

10 highlights of the IMF 1st review press release

• 1. The remarkable resilience shown by people in the face of enormous challenges. 
• 2. The commendable progress in implementing difficult but much-needed reforms and the economy showing tentative signs of stabilization.
• 3. Inflation down from a peak of 70 percent in September 2022 to below 2 percent in September 2023, gross international reserves increased by $1.5 billion during March-June this year, and shortages of essentials eased. 
• 4. Despite early signs of stabilization, full economic recovery is not yet assured. Growth momentum remains subdued, with real GDP in the second quarter contracting by 3.1 percent on a year-on-year basis and high-frequency economic indicators continuing to provide mixed signals. Reserve accumulation has slowed in recent months.
• 5. Sustaining the reform momentum for lasting recovery and stable and inclusive economic growth.
• 6. Government revenue mobilization to fall short of initial projections by nearly 15 percent by year end undermining the path to debt sustainability. 
• Importance to strengthen tax administration, remove tax exemptions and actively eliminate tax evasion and to rebuild external buffers by strong reserves accumulation.
• 7. The IMF Governance Diagnostic report to be published.
• 8. Steps taken on conducting bank diagnostics, developing a roadmap for addressing banking system capital and liquidity shortfalls and improving the bank resolution framework to ensure financial stability.
• 9. The headway made on regaining debt sustainability through the execution of the domestic debt restructuring and advancing discussions with external creditors. 

• 10. IMF 1st review decision – financial assurances on completion of debt restructuring and a new staff level agreement to be reached

• Executive Board approval of the 1st review requires the completion of financing assurances reviews as Sri Lanka is restructuring its public debt which is in arrears.

• These financing assurances reviews will focus on whether adequate progress has been made with debt restructuring to give confidence that it will be concluded in a timely manner and in line with the program’s debt targets.

• The team will continue its discussions in the context of the 1st review with the goal of reaching a staff-level agreement in the near term.

12 traits of missed expectations in the IMF prgramme

Contents in the IMF press release are reflective of bothered dreams of those who bankrupted and trapped the country in the IMF in pursuit of macroeconomic stabilization with debt sustainability through the IMF intensive care unit. 

It is now established that the country was pushed to the default of debt in order to resolve the so-called debt unsustainability through debt restructuring assisted and supervised by the IMF together with a supportive financial programme. 

However, it now turns out to be a false premise that has misled the national leaders and activists. 12 traits of the IMF press release are given below to highlight how the IMF programme dream has now been shattered.

1. Failed debt restructuring

The IMF never guided or supervised debt restructuring. Instead, it imposed conditions requiring the authorities to do it and provide the IMF with financial assurances to that effect. The IMF programme was delayed for one year to get the financial assurances in the form of consent of external creditors to debt restructuring process. Further, the decision of the IMF 1st review is to withhold the second tranche of US$ 330 mn because of the non-availability of financial assurances in the form of the completion of debt restructuring as per IMF conditions. Therefore, debt restructuring seems to a failing concept.

2. Another IMF staff level agreement on the table

The decision of the IMF 1st review is to go for another staff level agreement depending on the progress of actual debt restructuring. It appears that the problem is the deadlock in the external debt restructuring although the authorities chaotically attended to domestic debt restructuring options in September to please the IMF. 

Another level of staff agreement is a bizarre development in IMF programmes. The usual IMF procedure has been to decide the fate with the release or non-release of the tranches upon the periodical reviews of the progress of the fulfilments of the conditions laid-down in the initial staff level agreement approved by the IMF Board.

3. Tentative signs of stabilization and full economic recovery not yet assured

This is a strong blow at policymakers who frequently attempt to mislead the public by stating that the economy is now stabilized and recovered in a time of less than a year with the IMF programme and fiscal and monetary policies implemented within the IMF programme. However, the general economics knowledge is that it will take more than a decade to recover a country from an identified economic crisis.

4. Fiscal front lagging behind the IMF conditionalities

The progress of the reform on the fiscal front also falls short of the conditionalities although the authorities went pell-mell to raise tax despite lingering socio-economic consequences unfolding in front of their eyes. The failure of the IMF staff and their local agents to understand the inability to contract the government of a crisis-hit, significantly contracted economy by the monetary front is now established.

5. IMF Tax reforms not practical for Sri Lanka

IMF suggestions to strengthen tax administration, remove tax exemptions and actively eliminate tax evasion are the ones generally applicable even to developed countries including the US that annually runs deadlocks in debt ceiling and federal shutdowns. Therefore, such tax system reforms are only wastes of times to countries like Sri Lanka confronting and suffering contraction and bankruptcy in all corners.

6. External buffers lacking strong reserve accumulation

The reported increase in the foreign currency reserve at the central bank is not a strong reserve accumulation source. Therefore, the reserve built-up story of the policymakers is an insider deals-based manipulation of the macroeconomic figures. As the new central bank does not have a publicly accountable duty to build a florigen reserve, strong reserve accumulation has become a fiscal function. This requires stimulation of real economic activities to generate a foreign surplus, not on hot money pursued by the central bank on Treasury bills sales to speculative foreign investors.

7. Banking instabilities smoking

The conduct of bank diagnostics and developing a roadmap for addressing banking system capital and liquidity shortfalls and improving the bank resolution framework sound alarms for financial system instabilities possible on banking problems. It is not disputed the links of foreign currency and debt crises to banking crisis in the second round, given the significant exposures of banks to foreign currency and debt. 

Although central bank authorities affirm banking sector resilience and soundness indicators, the fact is the real banking vulnerabilities waiting to hit when the times comes. As the new central bank does not possess the conventional LOLR powers, crisis bank resolution has become a fiscal function.

8. Inflation control not credited to the super tight monetary bureaucracy

Although the IMF noted both historic inflation of 70% and historic disinflation to below 2%, it did not credit the tight monetary policy of nearly one and half years as the force behind the fall of inflation much below the monetary policy target. In contrast, the central bank governor received a high global rating for inflation control among other macroeconomic recovery aspects.

Despite the strong old monetarism followed by the IMF, its staff may have recognized market instabilities caused by the extreme political uncertainty towards hyper inflation and subsequently resumed political stability that was instrumental in regaining the market stability and fall of inflation at a faster rate of speed than expected by the central bank.

9. Debt restructuring towards IMF debt sustainability targets suspected

The IMF requires new financial assurances to ensure that the debt stock will decline to the sustainability level of below 95% of GDP by 2032 (from present 128%) and government gross financing needs falls to 13% of GDP (from present 24.5%) during 2027-32 period. Therefore, these are just numbers fixed outside real ground factors and, therefore, debt restructuring towards the achievement of such presumptuous debt sustainability numbers is highly suspected.

10. Resilience of people mis-interpreted

In fact, people confront living somehow or lingering death in the economy bankrupted by macroeconomic policymakers and controlled by security forces. Therefore, the IMF term “resilience” to show positive attitudes of people towards the economic crisis and recovery is inappropriate. That itself shows the insufficient knowledge of the IMF staff and its local agents on ground realities of Sri Lankan economy and people at present. Some people migrate with enormous difficulties while many have to live in increased poverty, not because of their resilience to the economic crisis and policies but because of the only option to live somehow as law abiding civilians.

11. IMF governance diagnostic report not ready and convincing

The governance diagnostic study is a geopolitical request of Sri Lankan authorities as a means to fight corruption alleged as the prime source to the country’s bankruptcy. The IMF does not have any professional background for such governance diagnoses for macroeconomic management, given its working background in old demand management concept and monetarism irrespective of the country circumstances and contemporary shocks. Therefore, even if this report is released, it will not provide any inputs to the recovery of the economy as corruption is not a macroeconomic variable recognized in the IMF demand management model or macroeconomic management models.

12. IMF financial programme failure looming

The IMF itself recognized exceptionally high risks to the program implementation at the beginning although Sri Lankan authorities did not pay any attentions to such risks. Instead, they treated the IMF programme as the God-given salvation of the country from the bankruptcy despite the contrasting evidence already available in many countries. 

Therefore, the 1st review deadlock is no doubt a firm early sign of implementation risks detected by the IMF at the beginning. The fact of the matter is the waste of time more than a year to understand real risks of the IMF programme.

Concluding Remarks

In this background, it is pathetic that our local creed of international economists have had to sit at the IMF table and do what ever few IMF staff members recommend without any regard to Sri Lankan ground realities or other country experiences. It is now clear that IMF programme is a part of geopolitics created akin to the foreign currency crisis. However, it has now gone beyond the limits of the country’s macroeconomic management that should be framed in national interest.

Meanwhile, some media reported the President saying that the IMF does not have a mechanism to help bankrupt countries where some IMF proposals will not ensure stability. He also is reported to have warned that there is a point beyond which people cannot be burdened and Sri Lanka is now going beyond that limit.

In addition, it is reported that the President at the Berlin Global Dialogue has expressed views akin to the IMF stated above. As reported the President has stated that the core of the global financial architecture today has been deigned almost eight years before whereas the world has seen many dramatic changes since then. However, international financial architecture has seen relatively mild reforms. The international financial architecture available makes the debt restructuring too complex.

Therefore, in view of the IMF 1st review press release and observations made above, it is necessary that relevant policymakers understand the failure of IMF’s demand control-based financial programmes in stabilizing and recovering the bankrupt economy of Sri Lanka and correct the macroeconomic policy mix to refix the economy without delay before hitting a full-scale banking/financial crisis sooner or later.

Here, the challenge is the choice over macroeconomic conceptual pack to suit the Sri Lankan circumstances. If policymakers continue to follow the conventional demand management concept deaf and blind without looking at root causes for the present bankruptcy, the failure is inevitable as already hinted by the President as above.

(This article is released in the interest of participating in the professional dialogue to find out solutions to present economic crisis confronted by the general public consequent to the global Corona pandemic, subsequent economic disruptions and shocks both local and global and policy failures.)

P Samarasiri

Former Deputy Governor, Central Bank of Sri Lanka

(Former Director of Bank Supervision, Assistant Governor, Secretary to the Monetary Board and Compliance Officer of the Central Bank, Former Chairman of the Sri Lanka Accounting and Auditing Standards Board and Credit Information Bureau, Former Chairman and Vice Chairman of the Institute of Bankers of Sri Lanka, Former Member of the Securities and Exchange Commission and Insurance Regulatory Commission and the Author of 12 Economics and Banking Books and a large number of articles published. 

The author holds BA Hons in Economics from University of Colombo, MA in Economics from University of Kansas, USA, and international training exposures in economic management and financial system regulation)

Source: Economy Forward