COLOMBO - As the bitter fighting between the Sri Lankan government and Tamil
Tiger rebels appears to be heading towards an end, with regular troops closing
in on the last remnants of Tamil Tiger resistance, the country's economic woes
are only increasing.
Pressure is now piling up on President Mahinda Rajapaksa's cash-strapped
administration to take more effective action to ease economic stresses that may
outlive a planned US$1.9 billion bailout package from the International
Monetary Fund.
National growth is projected to fall to 2-3% from 6% in 2008 due to the world
economic crisis, and many major development
projects may be suspended temporarily due also to continuing high military
expenditure.
The Central Bank (CB) in its 2008 annual report released last week warned that
a string of hydro and coal power projects, new port development, and a modern
oil refinery may have to be postponed or slowed down this year amid falling
revenues.
It would be "prudent" to postpone the implementation of new projects till the
recovery of global financial markets, the bank said.
Adding to the government's problems is a new campaign by rights groups opposing
IMF intervention without the "people's consent". Sarath Fernando, a veteran Sri
Lankan campaigner of peasants and farmers' rights, last week launched a
campaign, saying, "We strongly insist that no loan agreements should be signed
without a wide and participatory process of discussion on all relevant aspects
not only of the loans but also of the process of development."
Sri Lanka's crisis is two-fold. First, there is sagging export income and the
CB is using the few dollars it has to intervene in local money markets to
defend the island's currency, the rupee, from depreciating against the US
dollar. On the other hand, the government's access to cheap commercial
borrowings from foreign sources to fund the costly war against separatist Tamil
rebels has dried up with the global financial meltdown.
The country's gross official reserves by the end of December 2008 stood at $1.7
billion, sufficient just for 1.5 months of imports, compared with more than
$3.5 billion in December 2007.
Exports are down and garments - the biggest earner - are getting squeezed out
in other markets, while jobs are being shed across other employment sectors.
The Employers Federation, an umbrella group of employers, has asked the
government to reduce the number of working days per week to five from
five-and-a-half days in a bid to cut costs.
Last week, the Labor Ministry agreed to allow temporary lay-offs for a period
of three months and shorter working days in factories.
Fernando, coordinator for MONLAR, which represents people's organizations in
fisheries and plantations, says they are alarmed that the government is going
back to IMF loans under possibly "destructive conditions".
"The country is facing serious problems of foreign reserves and of debt. The
government is so bankrupt that the foreign reserves currently available would
be sufficient only for one month's imports and the IMF bailout package will
materialize only if the government fulfills a set of conditions, one of which
is to devalue the rupee, which would result in the cost of living going up
further by 50%," Fernando said.
Following the pledge by the Group of 20 countries of billions of dollars in
non-conditional aid to needy countries, the IMF has indicated that it may dole
out money in this fashion to Sri Lanka without the conditions of the past, but
suspicion continues that such aid would come with strings attached.
Sri Lanka's main opposition, the United National Party (UNP), believes that
"conditional aid" would be a good thing, as it would ensure the government puts
the money to good use instead of wasting it. UNP parliamentarian Kabir Hashim
told IPS that the government has wasted millions on extravagant projects, such
as a second national airline - Mihin Air - which cost nine billion rupees
(US$90 million) and has reported two years of losses.
"The government has been taking foreign commercial loans to pay off the debt,"
and the IMF needs to ensure that the aid money is channeled in the right
direction, Hashim said.
In Sri Lanka, the economic crisis began in 2007, soon after the government
began pumping billions of rupees into the war effort against the Liberation
Tigers of Tamil Eelam (LTTE). The aim has been to crush the rebels and clear
the areas of their eastern and northern strongholds for development and
government control.
More than two years later, Rajapaksa's administration is now on the verge of
eliminating the military and conventional capabilities of the Tigers who are
boxed in a small area in the north - reportedly using the civilian population
as a shield against government incursions.
Hundreds of people, including combatants and civilians, have died and scores
wounded or maimed. The international community has urged the government to act
with restraint, while urging the Tigers to free the civilians. Military
analysts expect government troops to seize control of the last remaining areas
by the first week of May.
At the end of March, an IMF delegation returned home after an 11-day visit
aimed at reviewing the CB's request for balance of payments support. A flexible
exchange rate policy - reduction of imports and increasing export revenues to
ensure a surplus (of dollars) - is what the IMF would ask the government to do
in the event the $1.9 billion bailout package is approved.
Economists said the team met CB and finance ministry officials and also had a
meeting with opposition leader Ranil Wickremesinghe.
The visiting team is expected to submit a report to the IMF board by the end of
April, and if a board decision is announced, the first tranche of funds will be
received immediately.
"There is no doubt the IMF will lend this money. It has a moral duty to help
countries in need," said Saman Kelegama, executive director of Sri Lanka's
Institute of Policy Studies. He said that for the past three years the IMF has
been dormant and has built up a lot of reserves. "The current crisis [across
the world] gives it space to assert itself again."
Sri Lanka's last IMF facility was a $567 million loan given in April 2003 to
support the government's 2003-2006 economic programme. The first tranche of $81
million was immediately received but the loan was suspended in November 2003
due to political problems and in April 2006 it expired. In 2007, the IMF closed
its Colombo office after the government decided not to accept conditional aid.
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