Sri Lanka budget challenge for IMF
By Feizal Samath
COLOMBO - 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.
The newly minted IMF country representative, Koshy Mathai, who arrived in the
island's 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. A vote-on-account is a
procedure by which the government obtains the vote of parliament for a sum
sufficient to incur expenditure on various items for a part of the year.
An IMF official, who declined to be named, said in response to an e-mail query
from Inter Press Service that 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 program". 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, bringing a new funding program, more
than two years after the fund ceased its operations in the country 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 program 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, such as cutting the budget
deficit, reducing wasteful spending and reducing the size of the state sector.
Subsequently, the government, stuck for funds and declining to go back to the
IMF for cheap credit, utilized 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. The IMF then 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 US$2.6 billion standby credit facility to
lift foreign reserves.
The JVP, which has consistently criticized the government for resorting to IMF
support, said on Tuesday that the IMF loan would lead to Sri Lanka being
eternally in debt or at least until 2050.
JVP parliamentarian Sunil Handunetti, speaking on Tuesday at a seminar
organized 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 $5 billion to pay the interest alone.
Based on documents and statistics presented at the seminar, Handunetti said
that within three years of the Rajapaksa government assuming power, the
country's outstanding debt had almost doubled to 4.2 billion rupees (US$36
million) from 2.2 billion rupees.
"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. Defense 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 killed in the fighting.
Despite the end of the fighting, defense expenditures have not gone down, since
the government 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 program, the government has agreed to sharply cut the budget
deficits to 5% of gross domestic product by 2011 from 7% 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 criticized the decision, saying that 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 program in
view of the elections. "The second tranche of the loan is due later this month.
It will be interesting to see what the IMF will do now that the budget target
has become an issue," he said.
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