COLOMBO - After months of being at the receiving end of international criticism
for human rights violations, Sri Lanka finally clinched a crucial agreement
with the International Monetary Fund (IMF) on Tuesday for a standby credit
facility of US$2.5 billion. This which will bolster the country's foreign
exchange reserves, depleted by the impacts of the global economic downturn and
an expensive war.
IMF managing director Dominique Strauss-Kahn said in a statement that was
cheered by Colombo's stock markets on Tuesday that a staff mission had reached
agreement with the Sri Lankan authorities, and the program is expected to be
considered by the fund's executive board on July 24. Its approval "would enable
Sri Lanka to draw an amount of about US$313 million immediately".
Though, technically, the final decision will only be known once the
approval comes, Sri Lanka central bank governor Ajith Nivard Cabraal told Inter
Press Service that the board meeting is just a formality. "We have reached
[the] agreement," he said.
In February, Sri Lanka requested an IMF credit facility of $1.9 billion
urgently needed to shore up sagging foreign reserves adversely hit by the
combined force of lower revenues from export income and rapid withdrawals by
foreigners who had invested in government bonds.
Last year, the central bank lost $600 million after foreigners pulled out their
money in bonds as stock markets began tumbling across the world owing to the
global economic crisis. On top of that, the financial markets regulator was
pumping in between $200 million to $400 million into local money markets to
stave off a shortage, which weakened the reserves.
By December 2008, gross official reserves stood at $1.7 billion compared with
$3.5 billion in the previous year. This money was barely enough to sustain 1.5
months of imports.
Share prices in the Colombo stock market climbed sharply on Tuesday in reaction
to the news. Turnover rose to one billion rupees (US$8 million) from around 200
million to 300 million rupees in recent days. Brokers said the news was
expected to boost confidence in the market and again entice foreign investors
to return to Sri Lanka. The end of a nearly three-decade long conflict in May
is also expected to trigger a surge in investments.
While most IMF standby credit facilities are approved quickly, considering they
are usually meant to offset contingencies, the Sri Lankan application was
delayed amid allegations of mounting civilian deaths and other human rights
allegations as the government entered the final phase of its war with Tamil
Tiger rebels.
Western powers put pressure on the IMF to delay it as a response to the
government's failure to act against abuses. Dozens of trapped civilians were
killed in the last stages of the battle in the north of the island.
On June 21, US Secretary of State Hillary Clinton said that it "is not an
appropriate time" to consider the IMF facility, considering the US government
was "trying to convince both sides," the Sri Lankan government and Tamil Tiger
guerrillas, to stop fighting.
"We think that it is not an appropriate time to consider that [loan] until
there is a resolution of the conflict," Clinton said. Her comments drew a
scathing response from Sri Lanka, which called the US a "bully" for obstructing
the loan.
On June 24, Sarath Amunugama, Sri Lanka's deputy finance minister, said US
interference in Sri Lanka's efforts to obtain an IMF loan was "deplorable".
Speaking at a Colombo seminar, Amunugama said: "The US has no business
obstructing a project that is technically sound, on the basis of its
misinformation. This is an unacceptable case of the bullies trying to run the
World Bank and the IMF".
On May 5, Reporters Without Borders (RWB), in a letter to the IMF, urged the
organization to obtain specific undertakings from the government to ensure
press freedom as a trade off for granting this loan.
RWB said the Sri Lankan government's crushing victory over the Tamil rebels at
a cost of thousands of civilian casualties had been accompanied by a ruthless
campaign against the press and critical voices.
"Of all the countries with a democratically elected government, Sri Lanka is
one that shows least respect for media freedom," it said.
However, Muttukrishna Sarvananthan, a Sri Lankan economist, believes the issue
had nothing to do with politics but economics and meeting fiscal targets.
"The real position of the proposed credit facility appears to be bogged down in
technical details. The technical discussions between the lender and the
borrower are ongoing, which are about safeguards against misuse of funds,
policies to fix the longstanding fiscal problem of Sri Lanka, prudent
management of the balance-of-payments, and the ability to repay," he said.
Negotiations with Turkey on a similar facility are taking longer than they did
with Sri Lanka, he pointed out.
"My understanding of the real bottleneck is that, the central bank is yet to
put forward a convincing fiscal, monetary, and balance-of-payments stability
package to the IMF, taking into account the latest post-war economic
imperatives," he said.
But another economist, who is close to senior officials at the central bank,
said international pressure was dampening Sri Lanka's prospects for the credit
facility.
"There was a lot of pressure from Western powers to delay the loan until
Colombo gets its act together on the political and human rights stage," said
the economist, who requested anonymity.
An experienced foreign diplomat, who also spoke off the record, believes that
Indian influence with the West saved the day for Sri Lanka.
"India has a lot of clout internationally and has asked Sri Lanka to provide a
reasonable solution to meet minority Tamil aspirations. In addition, after the
global crisis and criticism over Western-led IMF and World Bank policies [that
contributed to the crisis], countries like India and China are being treated
with more respect," he said.
Last week, on the sidelines of the summit in Egypt of non-aligned countries,
Indian Prime Minister Manmohan Singh met Sri Lankan President Mahinda Rajapaksa
and praised his leadership in winning the war.
Singh told Rajapaksa "that he was most suited to enforce a political
settlement," the diplomat said. "It looks as though India and Sri Lanka reached
some deal to provide Tamils some of their rights. In return, India [supported
Sri Lanka] on the IMF loan issue," he said.
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