Beware of IMF Macroeconomic Glossary - Is it to satisfy the IMF and their local agents or to mislead the public?

 

The IMF press release on the staff agreement for the IMF 48-month Extended Fund Facility (ETF) of US$ 2.9 billion was released on September 01, 2022, whereas same was reproduced in the CBSL press release issued on same day.

The IMF press release on the staff agreement for the previous ETF of US$1.5 billion for 36-months was issued on April 18, 2016, where the CBSL did not reproduced it.

I went though both press releases and found the IMF Glossary being almost same in intent of both press releases, except for few additions such as restoring macroeconomic stability and debt sustainability, reducing corruption, condition of receiving financing assurance (or debt relief) from Sri Lanka’s external creditors and IMF management approval stated in the present press release.

In addition, the difference in the purposes or aims of the two IMF programmes is noteworthy as the present programme is intended to support Sri Lanka's economic policies whereas 2016 programme has been to support government’s economic reform agenda.

Key National Issue in the Staff Agreement – A Violation of the Constitution

According to the IMF press release, it is the ETF agreement between the IMF team and Sri Lankan authorities on Sri Lanka's economic policies referred to in as above. As the present ETF is seen as the IMF bailout package to restore the economy from the present historic crisis, the relevant CBSL and Treasury officials should have agreed with the IMF team on the necessary Sri Lanka's economic recovery policies for determination of the IMF facility amounting to US$ 2.9 billion.

The CBSL Governor at a CNBC interview held on July 21, 2022, stated that Sri Lankan authorities have submitted to the IMF and creditors an overall macroeconomic stabilization programme including monetary policy reform, fiscal policy reform and reform of strategic state enterprises to achieve so called macroeconomic balance and stability. The IMF press release also refers to this macroeconomic stability without giving any interpretation.

The IMF press release also states about key areas of the government policy direction during next four years (48 months) such as

• fiscal consolidation, 

• cost-recovery based pricing of utilities, 

• rebuilding foreign reserves through restoring a market-determined and flexible exchange rate, 

• data-driven monetary policy for flexible inflation targeting regime with the Central Bank autonomy granted in a new Central Banking Act, 

• safeguarding the financial stability through a new Banking Act,

• mitigating the impact of the current crisis on the poor and vulnerable through targeted social safety net programmes and 

• reducing corruption through a stronger anti-corruption legal framework. 

Accordingly, these areas should have already been interpreted and covered in Sri Lanka's economic policies referred to in the IMF press release.

Therefore, it is evident that Sri Lankan fiscal and monetary policy autonomy that comes under the financial control of the Parliament has already been compromised by the Sri Lankan officials for the IMF programme without the approval of the Parliament. The economic and social consequences of this violation seem to be worse than the default of debt by same Sri Lankan officials on April 12, 2022, without the due approval of the Parliament for the amendment of the national budget 2022.

Although some analysts of the government state that this is only an agreement and not the final contract with the IMF, the fact is, this is the agreement that goes to the IMF management and the Executive Board for approval where no major amendments will take place interim, other than leisure meetings of the officials of both sides to show the seriousness of the work and refining the glossary.

Therefore, the treatment of confidentiality of the IMF staff agreement to the Parliament is not only a violation of the Constitution but also causes many vulnerabilities to the recovery of the economy.

According to the IMF press release, the agreement is subject to the implementation by the authorities of prior actions and receiving financing assurances from Sri Lanka’s creditors. Therefore, it is necessary to know the prior actions that have been promised to be implemented before receiving IMF funds. 

If they are to further contract the economy through policy actions such as interest rate hikes and increased taxes to bring down the inflation before the economic recovery as proposed by the CBSL Governor, all 225 in the Parliament will have to run away to foreign countries very soon to save their lives.

IMF Glossary requires interpretations

In lawful agreements, technical terms should be interpreted and agreed. The IMF press release contains several such macroeconomic terms that can have different meanings to different persons. 

Some of them are macroeconomic stability, debt sustainability, financial stability, financing assurance, corruption vulnerabilities, Sri Lanka’s growth potential, unsustainable public debt dynamic, sustainable revenue measures, fiscal transparency, April debt moratorium, sustainable and inclusive growth, the poor and vulnerable, social safety net programmes, data driven monetary policy, stronger central bank autonomy, comprehensive policy package to restore a market determined and flexible exchange rate, structural reforms and in-depth governance diagnostic.

Therefore, interpretation of most of these policy areas requires numerical benchmarks to avoid confusions and implementation hurdles.

IMF Programme in 2016 – requires investigations into whose failure

The IMF press release dated April 28, 2016, stated that the programme was to support the authorities’ ambitious economic reform agenda for the next three years which would reduce vulnerabilities, boost growth, and foster sustainable job creation. Some of the economic reform agenda stated therein were as follows.

• Raise the tax-to-GDP ratio to near 15 percent by 2020 by implementation of a new Inland Revenue Act, reform of the VAT and the customs code.

• Support a steady reduction of the overall fiscal deficit to 3.5 percent of GDP by 2020—equivalent to a shift from primary (excluding interest costs) fiscal deficits to primary surpluses that will underpin a much-needed reduction of public debt.

• Deal quickly with the legacy of Sri Lankan Airlines, which continues to represent a drain on public finances after years of mismanagement.

• Ensure that the pricing of electricity and fuels is guided by the market, with subsidies needed to protect the poor and vulnerable being better targeted and clearly reflected on the government’s budget.

• Central bank to shift toward a flexible inflation targeting regime while also undertaking measures to help deepen foreign exchange markets and a support a durable transition to a flexible exchange rate regime.

• With the implementation of these policies, Sri Lanka will support growth and build resilience to future economic shocks. Overall, the EFF will help the government achieve ‘lift off’ of the economy and fully tap Sri Lanka’s significant economic potential.

However, the present crisis testifies that the relevant authorities have failed to implement the ambitious reform agenda referred to in the IMF press release dated April 28, 2016, and the CBSL press release dated June 4, 2016.

If IMF programmes are so magical in macroeconomic management and stability as shown by its macroeconomic glossary, Sri Lanka should not have confronted such a catastrophic crisis soon after the end of the 2016 programme in June 2020, supported by other 15 programmes in the series since 1965.

The present CBSL Governor and the Treasury Secretary (while serving as the IMF Alternate Executive Director) held leading positions responsible for the policy implementation and advice to the government on the 2016-20 programme. Further, the present CBSL Governor held a responsible position (while serving as the IMF Alternate Executive Director) for same on the 2009-12 programme (the largest in the series).

As such, reasons to believe that the new IMF programme will support the newly ambitious policy reform agenda of the present government are very weak, given the poor policy track record of the CBSL Governor and the Treasury Secretary and the level of the bankruptcy confronted by the government and private sector in the present crisis.

The key public issue remains whether the compromise of the national policy autonomy to the IMF programme is worth for US$ 2.9 billion for five years or for keeping the public positions of the relevant officials under the cover of the IMF programme.

 (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 10 Economics and Banking Books and a large number of articles published)