Are the conditions of the International Monetary Fund unfavorable to the country? The International Monetary Fund is not a traditional bank but an institution set up to manage monetary and reserve funds. Both the International Monetary Fund and the World Bank were established on the same day in 1944 in the United States. The areas in which the International Monetary Fund operates are primarily to stabilize the economies of countries by helping to maintain microeconomic activity and financial stability. The specialty of the International Monetary Fund is to facilitate compliance with the conditions recommended by them.
The services of this institution can be identified as providing short and medium term financing for the above matters and intervening in balance of payments crises.
Their conditions can be summarized as follows.
1. Increase taxes and reduce government spending to reduce public debt
2. Raising interest rates for financial stability
3. Closing loss making institutions
4. Making structural adjustments, privatization under it, free market development, elimination of waste and corruption and elimination of bureaucracy.
There are various opinions on these conditions, and one of the main points is that under the effectiveness of these conditions, the situation in poor countries is often more likely to worsen, and cases have been observed.
But an examination of the economic conditions and crises in many of the poorest countries reveals that those conditions exist in those countries because of historical conditions and often economic and other management weaknesses, and not on the terms of the International Monetary Fund.
It can be observed that the economic activity of the developed countries, however, is often compliant with these conditions in the poorer countries.
It has to be acknowledged that according to the existing dividing line, poor (developing) and rich (developed) countries are considered by economic criteria. It must be acknowledged that the continent of Africa, no matter how rich in raw materials, is not relatively rich in its economic status.
If so, the impetus for narrowing this dividing line is for the poorer countries to become economically stronger. The shortest and easiest way to change this situation is to analyze and follow the course of action adopted by developed countries. In short, it is working for capitalist development. This is because it is now understood that even the emergence of a socialist society is impossible without capitalist development.
Let us consider tax increases to reduce government debt, which is the first of the conditions of the International Monetary Fund. Taxation has been around for a long time. Its essence is that a portion of the surplus earned from an economic activity must be spent on maintaining the society that provided the opportunity to carry out that activity. No matter how many irregularities there are in this process, it can be considered as a cornerstone for the survival of the society. It is therefore the responsibility of the current government to implement it more scientifically.
It is a well-known fact that tax collection in economically poor countries is irregular, often with a high indirect tax rate, while in rich countries the direct tax rate is high. In the Scandinavian countries, where per capita income is high, this direct tax rate is as high as 50%. Considering the prevailing climate in those countries, it appears that the tax mechanism, that is, the method of collection and spending, is scientifically and optimally functional.
The second part, the reduction of government spending, is a matter of controversy in the context of poor countries. This is due to the failure of existing governments to stop white elephant projects and reduce waste and corruption instead of measures such as slashing the salaries or facilities of public servants. Governments in poorer countries are reluctant to cut government spending because of the inability to recover.
The fund withheld $ 290 million by 2020, the last tranche of the IMF’s $ 1.5 billion financial facility approved for Sri Lanka in 2016. The basis for this was a tax revision by the present government. Under that amendment, the government had to reduce tax revenue by 1/3 of the existing amount. This was contrary to the policies of the International Monetary Fund and they cut off the last part of the facility.
By mid-2020, the central bank’s injection into the rupee economy and the lowering of interest rates had given a new lease of life to the economy, which had been mired in Covid lockdown.
Despite differing views on lowering interest rates, it is clear that they do not comply with the terms of the IMF.
Sri Lanka has a very high record of maintaining loss-making institutions. It is very clear that all but a few state-owned banks are operating at a loss. These losses are eventually remitted to the Treasury and reimbursed with public funds. State-owned banks provide loans to sustain these loss-making institutions, and banks receive large revenues from interest payments. State banks are very supportive in running such loss-making institutions.
This policy is also contrary to the NFF policies. It is clear that the present government is not interested in restructuring loss-making institutions as an alternative to closing down.
Structural adjustments include privatization, deregulation and free market development, elimination of waste and corruption.
Although privatization comes to the fore as a means of getting rid of loss-making state institutions, there are many instances where the relevant sectors have been elevated to a very high level by moving forward with it.
Under privatization, state capital is replaced by private capital. This includes state institutions and state property. The world-recognized privatization system, including the International Monetary Fund, is complex. This is because not all government-owned enterprises and assets can be privatized. Determining that sales price is also a daunting task.
Therefore, it is necessary to make institutional divisions, restructuring, openings for competition, and so on, subject to regulation of shares that cannot be opened for competition, and so on.
The commitment of a government to this end is essential and must be done very openly and with the consent of its stakeholders. It is emphasized that the long-term existence of freedom of speech, freedom of information, freedom of the media, the rule of law, stable policies, etc. is essential as the people of the country are stakeholders here.
Although the present government has made some efforts to privatize, none of them have been so successful so far. The reason for this is that they have been given the mandate to implement a referendum that they had put forward for an extremely nationalist program. In addition, the government’s reluctance to take such a step is likely to further erode public confidence in the government, even if it conforms to the terms of the International Monetary Fund due to the anti-American and anti-Western slogans they culminate in the election.
An analysis of the above reveals that under the current circumstances, it is difficult for the government to obtain financial assistance from the International Monetary Fund.
As the government has a better understanding of this, it has realized that the feasibility of obtaining financial assistance from the International Monetary Fund is low.
Accordingly, although China is currently expected to be the final choice, the possibility of this situation changing after the arrival of the new finance minister cannot be ruled out.
Keerthi Godigamuwa