International Monetary Fund loan:

No unpalatable conditions

Central Bank Govenor Ajith Nivard Cabraal answers questions on the current financial situation in the country. We reproduce below some questions and answers:

In the past, even during periods in which there was no global crisis, or when some people claimed that the Sri Lankan economy is in the hands of some self-proclaimed wizards, we can remember very well the terms and conditions they subjected our country to.

In fact, they sold the hugely profitable Insurance Corporation at a song even before obtaining any money as loan. They agreed to sell the CWE, and sold it later. They agreed to stop new recruitments to the Government sector. They agreed to privatise the People’s Bank and break it up.

They agreed to divide Inland Revenue Department into several pieces. Even after agreeing to these unpalatable actions, they failed to fully secure the loan facility. That is their so-called spectacular economic management.

Q: It is said that there is a severe financial crisis in the country. What is your view?

A: It is true that there is an economic crisis all over the world, today.

What do we see on International TV? Banks collapsing in the developing world; People swept out of their dwellings; Hundreds of thousands losing their jobs; historical slumps in share markets; corporates becoming bankrupt.

In the meantime several developed countries are injecting billions of dollars to their economies in order to stabilize their financial systems. Some banks and insurance institutions have been nationalized. We see such crises developing every day.

But, we know things of that magnitude have not happened in our country.

Even with all these problems in the world, we are still moving forward with our plans. We have been able to implement large scale and rural projects; defeat the most terrible terrorist group and provide support for the internally displaced persons.

Please remember that many of these economic horror stories are created by a group of people who wish to see an unstable country and an unbalanced economy and are trying their best to destabilize our country.

Q: It is said that due to the rapid decline in foreign reserves, we have to borrow US$ 1,900 million from the IMF. Does that not indicate that there is a severe economic problem in the country.

A: Doesn’t a person obtain a loan when he has to build a house? Or to spend for his children’s education? Or for a critical illness? Or at the time of an accident?

A person borrows money from a bank in line with his economic capability and needs. Does it then mean that he or she is in an economically crisis situation, if he or she borrows? If that is the case, all borrowers have to be labelled as persons in crisis with severe economic problems, according to such pundits.

We shouldn’t look at these issues from such silly angles. Let us remember that it is natural to borrow funds, either for the overall economic development and well-being of a country or for new projects.

All previous governments in Sri Lanka had done so. Of course, in the past, some governments even borrowed to eat bread. We are still paying such loans. But under the current scenario, we borrow to continue with the development process of the country.

As of today, due to the severe global financial crisis, we have difficulties in getting loans from the usual lending sources. This is not only true for our country. It is a common problem for every country.

As traditional lending countries and banks are in a severe crisis situation, they are not able to lend, as in the past. Their deterioration is so much, that they themselves are struggling. If so, we have to search for funds from other sources if we are to continue our development efforts.

That is why we are in the process of negotiating a Stand-by Arrangement of US$ 1,900 million from the IMF. Sri Lanka is a member of the IMF.

Therefore, if we are in need, we have the right to seek funding from them.

In fact, we have an overall limit to borrow upto about US$ 3,200 million from the IMF. But now, we are negotiating to borrow a relatively smaller amount, and also at a very low rate.

Q: What is the real situation of the country’s foreign reserve position?

A: The Central Bank has already issued public statements about the foreign reserve position of the country. In our news announcements, we have given details about the amount of foreign reserves held by the Government and banking system, how much it has reduced since the September crisis, the reasons for such reduction, and so on.

As explained many times, the drop in foreign reserves was mainly as a result of the sudden and significant outflow of funds due to problems faced by foreign investors in their own countries due to global financial crisis. But fortunately, we had prudently built up our reserves to face such shocks.

In fact, because of our prudent policies, we had recorded our highest ever reserve levels just before the global shock. So, we were prepared. It is like ordinary people saving to meet a shock. If such a shock or problem confronts them, they use the savings to mitigate the impact of the shock.

Foreign reserves are also built up and maintained by any country, to use such reserves in an unforeseen situation and to face the shock. We have already successfully faced the first phase of the global crisis.

At the same time, we are now taking a number of measures to rebuild the reduced reserves, and to strengthen ourselves once again. We believe that this IMF loan would support and supplement such measures. Not only that. What is essential for the country now is whether our future cash flows are adequate.

On that account, we are quite comfortable since we can meet our obligations without any interruption, whatsoever. Since that is the case, it is sad that there is a group that is desperately trying to panic investors, discourage entrepreneurs and destabilize the economy.

Q: It is said that such a huge amount of money is to be obtained subject to various conditions of the IMF. The Government which initially said that they will not get assistance under conditions of foreign financial institutions, is now seeking assistance under various terms and conditions. Why?

A: In the past, even during periods in which there was no global crisis, or when some people claimed that the Sri Lankan economy is in the hands of some self-proclaimed wizards, we can remember very well the terms and conditions they subjected our country to.

In fact, they sold the hugely profitable Insurance Corporation at a song even before obtaining any money as loan. They agreed to sell the CWE, and sold it later. They agreed to stop new recruitments to the Government sector.

They agreed to privatise the People’s Bank and break it up. They agreed to divide Inland Revenue Department into several pieces. Even after agreeing to these unpalatable actions, they failed to fully secure the loan facility. That is their so-called spectacular economic management.

But today, neither the Government nor the Central Bank would enter into such problematic and controversial terms and conditions that are not endorsed by the people. As the IMF already indicated, IMF facilities would enable us to effectively proceed with the policies and the long term economic framework of the Government.

Therefore, we can state, with a sense of responsibility, that there would not be unpalatable terms and conditions, although such things happened in the past.

Of course, I can understand as to why some people should feel jealous of the current achievements of the Government. It is natural for them to feel bad when they see that this Government is doing something that could not achieve when they were in government.

They are feeling the same way in relation to the victory of the Government in the war on terror, too.

The people know that well. But, at this stage we have to urge these persons to think of these initiatives as national initiatives and support these measures, without criticizing from an unpatriotic and selfish point of view, just to make their true feelings.

Some of these people are also questioning as to why we said at the beginning that we are not going for IMF facilities, and as to why we are now seeking IMF assistance. All along, we have clearly stated that we are not going to borrow from the IMF for that matter, from anyone else, if they are not supportive of our policies and programmes.

At the same time, there is no reason for us not to take a loan facility from an institution, if we are getting it at concessional interest rates and without unfavourable terms and conditions. That is our simple answer.

Last year, the World Bank offered a loan facility of about US$ 900 million covering project loans during the period from 2009 to 2012. We availed ourselves of such facility, as the World Bank was comfortable about working within the existing Government policy framework. We would not have borrowed funds from that source if they had stipulated unfavourable terms and conditions.

We obtained the loans as they agreed with our policies. I ask you: Did we sell any public asset to qualify to receive such a loan? Did we lay-off public sector employees? Did we bow down to terrorism and stop the humanitarian effort to receive funds? No! we did not.

On the same lines, we are negotiating with the IMF. We do not see any reason not to borrow from the IMF, as long as they do not set out unfavourable terms and conditions to us, and prescribe any policies which are not in line with the government’s existing policies.

Sri Lanka is a member country of the IMF. Our President and Finance Minister serves as a member of the Board of Governors of the IMF, its highest policy making body. In these circumstances, we need not to be reluctant to obtain IMF assistance if they do not offer unfavourable conditions.

Q: Such a huge amount of loans on short term basis has never been obtained before. Do we have capacity to repay these loans in this economic crisis?

A: The IMF facility is not a short term facility. A short term facility is generally one that has to be repaid within a one-year period. This facility that we are negotiating is one which could be obtained in staggered amounts, as and when necessary. That is why it is named as “Stand-by Arrangement”.

The repayment of this loan will commence after about 2 years. Discussions will be centered on repayment over a 3-5 year period. The purposes of such loan will be to finance the resource gap that has arisen because of the shortage of finances in world financial markets due to the global crisis.

We have to continue with our development activities, especially in the East and North, and strengthen ourselves economically from all sides. We are confident about doing so. In that scenario, we will have the ability to repay these loans comfortably.

Q: If there is no problem in the financial sector of the country, what is the purpose of getting such a huge amount of loans?

A: As I have already mentioned, it is not necessary to have a problem to obtain a loan. What is necessary is a justifiable purpose. Today, we all know about the massive on-going development efforts in the country.

The value of such development efforts is more than 3 times the value of the entire Mahaweli Project! Development projects are carried out all over the country from Point Devundera to Point Peduru.

The Government’s need is to continue with these projects. Because of these massive projects and the village level initiatives, our per capita income which was around US$ 800 in the recent past, has exceeded US$ 2,000 today. Sri Lanka is now a middle income country.

The poverty rate has declined to 15 per cent by last year, from a massive 23% just about 4 years ago. Developments are taking place to ensure a more balanced growth regionally. Tanks are being renovated. Electricity is being provided. Schools are being renovated.

New concrete roads are being built. Court Complexes are being constructed.

We remember the period when farmers took poison and committed suicide because of their troubles. Today, farmers are getting good incomes. The lowest unemployment rate in our country was recorded during the last year.

Apart from that, large scale projects have been carried out all over the country and these can be seen by the public. The Kerawalapitiya Power Plant is already completed while the work of projects such as Upper Kotmale Power Plant, Hambantota Port, Norochcholai Hydro-Power Plant, Colombo South Port, etc are in progress.

Work of the A-9 Road, Colombo-Katunayake Highway will commence soon. Should we stop these works, saying that there is a global economic crisis? Do we have to ruin our education system due to the world recession? Do we have to bring to halt the “Gama Neguma” and “Maga Neguma” programmes? Should we now ignore the benefits that people are getting through these projects? Moreover, we have already commenced “Negenahira Navodaya” Programme and it is going on well.

The President has ordered all the relevant Ministries to get ready to commence the massive development effort named “Uthuru Vasanthaya” very soon. Aren’t these works essential today? Is anyone suggesting that we postpone such efforts? Of course, these developments cannot be valued by some politicians who conveniently pose off as economic pundits.

They are regularly cultivating in bookshelves, and issuing highly biased statements to media. Their vituperative comments do not disturb us. In fact, they said that our inflation will be like in Zimbabwe. What happened? Today, it is just 7%.

They said that global investors will never invest in Sri Lankan bonds.

What happened? The bond issue was over-subscribed by 3 times. For the past 3 years, every week, they have been warning that the economy will collapse the next week. But, our people now know the hidden agendas of these so-called experts.

In this instance too, these political economists will fail in their effort to destabilize the economy. The general public in this country, truly believe that we should continue with the development effort.

To do that, we have to gather necessary resources to accomplish these tasks. When we obtain facilities from the IMF, there is no doubt that other development partners and investors too, would be encouraged to contribute to our development effort.

All of them will support in our development efforts, even in these difficult times. We would lay the necessary foundation for such an outcome through the IMF Stand-by Arrangement.

Q: It is said that Governments revenue is not being collected, as expected. In this situation, further borrowings by the Government would aggravate the economic problems in the country? Your comments?

A: Particularly due to a reduction in import demand, there is a drop in the tax income on imports. This has resulted in a reduction in Government revenue this year. Therefore, we will also have to supplement our revenues, in various ways.

At the same time, the Government, has two ways in which if they can address this fundamental issue. One option is to discontinue all on-going projects. If they do so, there is a possibility of economic growth of the country reducing and thereby leading the country into a difficult situation.

The alternative option is to continue with development programmes with new support assistance from new sources. The Government has now taken a policy decision to continue with the country’s development activities.

On that basis, in order to move forward with all projects, we intend to supplement our reserves and avail ourselves of the IMF facilities. What will happen to our economy as a result would be that we would emerge more stronger.