IMF Quits Sri Lanka

by Feizal Samath, Inter Press Service, February 14, 2007

COLOMBO, Feb 14 (IPS) - The International Monetary Fund (IMF) shut its Colombo office this month saying it no longer had a Sri Lankan programme, but economists and civil activists say the Fund is still expected to keep a watch over this war-battered nation.

''I doubt the IMF will stay away for long. Look … the government disbursed just 20 percent of foreign funds each year (from all donors) but still the IMF chose to remain (despite all the criticism),'' noted Sarath Fernando, a well-known civil society activist.

Muttukrishna Sarvananthan, an economist and principal researcher at the Point Pedro Institute of Development, says the IMF will oversee Sri Lanka from its New Delhi office. "We still owe them money."

Ever since opening an office in the late 1970s, soon after Sri Lanka embraced economic reforms and a free market -- much ahead of India and the rest of South Asia -- the IMF has had a rocky ride with opposition from left-wing groups and farmers. Sri Lanka became a member of the Fund in 1950.

The Fund has been critical of Colombo’s high budget deficits that have reached nine percent of gross domestic product (GDP) thanks to excessive public spending and a bloated public sector. It wants leaner and meaner adminstrations, advocates raising tax to collect revenue for state spending and across-the-board subsidy cuts. This has not found favour with large sections of the country’s population, many of whom are dependent on subsidised farming.

In recent months, however, the government has assailed the IMF saying its stringent conditions for lending were unacceptable.

A few weeks after the IMF in a Christmas eve announcement said it was closing the Colombo office, Sarath Amunugama, an influential minister who earlier served as finance minister, told reporters that Sri Lanka was not running after the World Bank or the IMF anymore to obtain loans. "There are several countries willing to help Sri Lanka," he was quoted as saying. [see NYT article below]

Amunugama, who is minister for enterprise development and investment promotion, cited the 700 million US dollars worth of support offered by Iran as aid with no stringent conditions, soon after the after the Development Forum in January hosted by the government for Sri Lanka’s donors.

The outspoken minister said Japan, China, India, Hungary and several East European countries were ready to provide aid to Sri Lanka and noted that it "is an utter myth that Sri Lanka is under obligation to the World Bank or the IMF to get aid.’’

‘’Many countries like Thailand have stopped borrowing from IMF and also the IMF has less money to lend. The Fund’s conditions, over and over again, are not being followed and hasn’t got civil society acceptance," notes Fernando, one of the main coordinators of the Movement for National Land and Agricultural Reform (MONLAR).

Uruguay, Brazil, Argentina and Indonesia are among the countries that have shut down their accounts with the Fund in recent months, prompting concern among rich nations that dominate the board of the IMF that they were rapidly losing credibility as well as the ability to influence economic policy with important clients.

The United National Party (UNP) government of 2002 lost parliamentary polls in April 2004 after its World Bank/IMF-inspired reforms did not ‘trickle down" to the poor fast enough. The government was accused of spending all its resources and too much time on a peace process and ceasefire with Tamil militants, determined to carve out a separate state in the north and east of the island.

"Failing to understand the aspirations and the needs of the poor was politically suicidal. The UNP’s ‘Regaining Sri Lanka’ plan (to build a new economic order in the country using the peace process as a base) was very unpopular because it mostly benefited businessmen," Fernando said.

But economist Sarvananthan argues that the trickle down effect does not happen overnight. "It takes a long time," he said, adding that the IMF’s presence in Sri Lanka was added comfort to donors and foreign investors. ‘’It provided some security to donors, while investors knew the IMF provided the important checks and balances in the country.’’

In its closure announcement, the IMF said the decision reflected the evolving nature of the IMF's relationship with Sri Lanka, with the country no longer having a programme with the IMF.

The Fund's senior resident representative for Sri Lanka, Luis Valdivieso, said the decision was also was taken in the context of the overall declining budget available to the IMF to maintain an office in Colombo. The Washington-based IMF will continue to maintain a close relationship with Sri Lanka, with staff visiting regularly to exchange views with the authorities, he said.

Two days before the surprising announcement, the Fund, in its last report issued in Colombo, warned Sri Lanka to settle its long-standing ethnic conflict that has claimed over 65,000 lives since violence intensified in 1983.

"Sri Lanka's near- and medium-term economic prospects depend critically on progress on the peace front and on implementing essential reforms," the IMF said in its annual review known as the Article IV consultations.

Since 2003, the IMF has lent to Sri Lanka more than 400 million dollars in SDRs (Special Drawing Rights) for poverty reduction programmes and balance of payment support, but Colombo has drawn less than 60 million, clearly exposing the country’s weak foreign aid disbursement mechanism.

Nimal Sanderatne, Sri Lanka’s most eminent economist and a retired central bank official, believes there was no IMF programme because the government was unable to meet the ‘conditions’. "The IMF move is a negative signal to investors. A lot of their decisions were based on IMF-World Bank strategies," he said, adding that the Fund’s call for cutting the budget deficit was reasonable as the state was spending heavily on unproductive segments like defence.

MONLAR’s Fernando, a vocal critic of the IMF and World Bank, says the Fund’s prescriptions of faster growth has not reduced poverty. "We are not saying Sri Lanka shouldn’t use these loan facilities but there should be out of the box thinking to suggest different approaches -- instead of the same old solutions -- and also convince the IMF to accept the views of the people."

"For decades these prescriptions haven’t worked. It has only led to the poor subsidising the rich through grand infrastructure building of new airports and ports. The Washington-based agencies say they have consulted the people but the people who raised the questions have been ignored," Fernando argued.

D.E.W Gunasekera, a Communist Party leader and a minister in the government, reckons the IMF no longer has a role to play in a world order that is changing. "Some 45 percent of the world’s GDP is controlled by Asia and the U.S. doesn’t have a say anymore. These are the realities for the IMF."

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Help Not Wanted

by Moises Naim, The New York Times, February 15, 2007

MY friend was visibly shaken. He had just learned that he had lost one of his clients to Chinese competitors. “It’s amazing,” he told me. “The Chinese have completely priced us out of the market. We can’t compete with what they’re able to offer.”

There’s nothing surprising about that, of course; manufacturing jobs are lost to China every day. But my friend is not in manufacturing. He works in foreign aid.

His story is about Nigeria’s trains. The Nigerian government operates three railways, which are notoriously corrupt and inefficient. They are also falling apart. The World Bank — where my friend works — proposed a project based on the commonsense observation that there was no point in lending the Nigerians money without also tackling the corruption that had crippled the railways. After months of negotiation, the bank and Nigeria’s government agreed on a $5 million project that would allow private companies to come in and help clean up the railways.

But just as the deal was about to be signed, the Chinese government offered Nigeria $9 billion to rebuild the entire rail network — no bids, no conditions and no need to reform. That was when my friend packed his suitcase and went to the airport.

It is not an isolated case. In recent years, wealthy nondemocratic regimes have begun to undermine development policy through their own activist aid programs. Call it rogue aid. It is development assistance that is nondemocratic in origin and nontransparent in practice, and its effect is typically to stifle real progress while hurting ordinary citizens.

China is actively backing such deals throughout Africa; its financing of roads, electrical plants, ports and the like boomed from $700 million in 2003 to nearly $3 billion for each of the past two years. Indeed, it is a worldwide strategy. Beijing has agreed to expand Indonesia’s electrical grid in a matter of months. Too bad the deal calls for building several plants that use a highly polluting, coal-based Chinese technology. No international agency would have signed off on such an environmentally unfriendly deal.

In the Philippines, the Asian Development Bank, which lends money at low interest rates to poor countries, had agreed to finance Manila’s new aqueduct. It, too, was suddenly told that its money was no longer needed. China was offering cheaper rates, faster approval and fewer questions.

What’s behind this sudden Chinese drive to do good around the world? The three short answers are money, international politics and access to raw materials. China’s central bank has the world’s largest foreign exchange reserves, totaling $1.06 trillion. Beijing is increasingly leveraging this cash to ensure its access to raw materials and to advance China’s growing global influence. What better than a generous foreign-aid program to ensure the good will of a petro-power like Nigeria or a natural-resource-rich neighbor like Indonesia?

China is not the first country to make aid a tool in advancing its interests abroad. The Soviet Union and the United States spent decades giving development aid to dictators in exchange for their allegiance. Even today, American largess to Egypt and Pakistan is rooted in geopolitical calculation.

But beginning in the 1990s, foreign aid had begun to slowly improve. Scrutiny by the news media shamed many developed countries into curbing their bad practices. Today, the projects of organizations like the World Bank are meticulously inspected by watchdog groups. Although the system is far from perfect, it is certainly more transparent than it was when foreign aid routinely helped ruthless dictators stay in power.

Nor is China the only regime offering rogue aid. President Hugo Chávez has not been shy in using his nation’s oil money to recruit allies abroad. Indeed, Venezuela’s ambassador to Nicaragua, explaining his country’s large aid packages in the region, bluntly announced, “We want to infect Latin America with our model.”

Mr. Chávez’s financial aid to Cuba far exceeds what the island used to get from Leonid Brezhnev during the heyday of Soviet communism, and it has dashed hopes for Cuba’s opening as a result of Fidel Castro’s demise and the island’s bankruptcy. Because of Mr. Chávez’s artificial lifeline, Cubans will be forced to wait even longer for the indispensable reforms that will bring their society opportunities for true prosperity and freedom.

Iranian aid to Hamas in Palestine and Hezbollah in Lebanon may have increased Iran’s influence in the region, but it is damaging to the people in those countries for the same reason that Venezuelan aid hurts Cubans. The same can be said of Saudi Arabia’s sponsorship, in countries like Pakistan, of religious schools that fail to equip students with the skills they need to get jobs.

One could argue that students are surely better off going to any school than being in the streets. But why should these be the only options? Why can’t the Saudis finance education, the Chinese pay for railroads and electric grids, and the Venezuelans help Cuba’s economy without also hurting poor Pakistanis, Nigerians and Cubans? Because the goal of these donors is not to help other countries develop. Rather, they seek to further their own national interests, advance an ideological agenda or even line their own pockets. Rogue aid providers couldn’t care less about the long-term well-being of the population of the countries they aid.

States like China, Iran, Saudi Arabia and Venezuela have the cash and the will to reshape the world into a place very unlike the one where we want to live. By pushing their alternative development model, such states effectively price responsible aid programs out of the market exactly where they are needed most. In place of those programs, rogue donors offer to underwrite a world that is more corrupt, chaotic and authoritarian. That sort of aid is in no one’s interest, except the rogues.

Moisés Naím, the editor in chief of Foreign Policy magazine, is the author of “Illicit: How Smugglers, Traffickers and Copycats Are Hijacking the Global Economy.”