IS PRESIDENT A HOSTAGE OF THE UGLY AMERICAN?

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By Shivanthi Ranasinghe

The whole point of President Gotabaya’s special address to the nation on 16 March was to announce his decision to work with the IMF. This is a move the Governor of the Central Bank, Ajith Cabraal, was adamant to prevent. The Administration’s reluctance to work with the IMF is obvious. The actual loan terms as in the form of interest rates from the IMF may be favorable. However, the same cannot be said of the conditions that follow the financial aid package. 

The IMF’s focus is firmly locked in the bottom line. After all, their sphere is finances. The human aspect does not factor into their logic. Therefore, the structural reforms they usually bully their client Governments to adapt in the form of austerity can be the death of democratically elected Governments. 

Furthermore, as Sri Lankans we cannot forget the IMF’s decision to hold off a financial package due to Sri Lanka in the early 2009. The IMF was bending to the will of the newly elected US State Secretary Hillary Clinton. She nursed a strange sympathy for the LTTE, who were about to be militarily defeated. Every Sri Lankan eye was glued on the war with fresh hope for a day without terrorism. Generations born after 2009 will never quite know the meaning of hope or what it’s really about. Yet, Clinton’s mission was to rescue the LTTE. 

One ploy she thus adapted was to try twisting the IMF’s arm into not releasing the financial package worth USD 2 billion to Sri Lanka. Her intention was to starve the country of the much needed finances to continue with the war. Without this funding the entire war machinery would have stalled and the LTTE would have survived to terrorise yet another day.

The IMF was not impressed with the pressures exerted by Clinton. They had in fact complained directly to Timothy Geithner, the then US Secretary of the Treasury that Clinton was “intruding into their domain”. Nevertheless, until the IMF sorted the matter out with the US Government the much needed funds sat idle. 

Fortunately, then President Mahinda Rajapaksa’s good relations with the Middle East paid off. With one telephone call to the then leader of Libya, Colonel Gaddafi, 

Sri Lanka secured the verbal promise to get the same amount from Libya. Those who accuse the Mahinda Rajapaksa Administration of losing the international community clearly do not know this piece of history. Gaddafi never actually made the transfer. However, his assurances lent confidence to investors, which kept the ball rolling. The lesson with regard to the IMF was that IMF assistance may leave the country exposed to US diktats. 

Therefore, President Gotabaya’s decision to work with the IMF does not support the platform that served to form this Government. The key emphasis that marked the Presidential Election was to ward off foreign interferences. In this light, the structural reforms the IMF would insist on would not be digestible to the voter.

However, the Government rebel faction led by Vasu-Udaya-Wimal cannot use this to feed their narrative that the President is held hostage by the “ugly American”. The reason being former Energy Minister Udaya Gammanpila too advised the Government to seek assistance from the IMF. He also advised the Government to reduce the fuel taxes, as a relief to the people. Tax relief and the IMF however do not go hand in hand. 

IMF initial recommendations

In late February 2022, the IMF board of directors held preliminary consultations with Sri Lanka. In the report they released, it is stressed, “the urgency of implementing a credible and coherent strategy to restore macroeconomic stability and debt sustainability, while protecting vulnerable groups and reducing poverty through strengthened, well-targeted social safety nets.” 

In the same breath they also emphasise “the need for an ambitious fiscal consolidation that is based on a high-quality revenue measure”. As such they advocate “increasing the income tax and VAT rates and minimising exemptions, complemented with revenue administration reform”.

They also encourage “continued improvements to expenditure rationalisation, budget formulation and execution, and the fiscal rule… to reform state-owned enterprises and adopt cost-recovery energy pricing.” Furthermore, “a tighter monetary policy stance” is advised “to contain rising inflationary pressures, while phasing out the central bank’s direct financing of budget deficits.” 

They also recommend “a gradual return to a market-determined and flexible exchange rate to facilitate external adjustment and rebuild international reserves,” and “gradually unwind capital flow management measures as conditions permit.”

The report applauded the Government’s prompt action to help the public cope with the effects of the pandemic, which included a strong vaccine drive, macroeconomic policy stimulus, an increase in social service spending and loan repayment moratorium for affected businesses. 

The report observed, “GDP growth is projected to have recovered to 3.6 per cent in 2021, with mobility indicators largely back to their pre-pandemic levels and tourist arrivals starting to recover in late 2021.” Still, the woeful situation continues “due to the pre-pandemic tax cuts, weak revenue performance in the wake of the pandemic, and expenditure measures to combat the pandemic.” 

Cabraal gives ‘ouch’ to Ranil

The missing element in this IMF report is Sri Lanka’s pre-pandemic economic conditions. Instead, the IMF has tied Sri Lanka’s financial downfall to the 

pre-pandemic tax breaks introduced in late 2019 – one of the first steps taken by President Gotabaya. This move has been criticised by many of nationalists as well. 

The fact overlooked by many is that when President Gotabaya took Office the economy was already in the doldrums.  With the lowest economic growth in the region (save for Afghanistan), businesses were struggling to keep afloat. The tax cuts were a necessary dose of oxygen the business community needed to revive. Of course tax cuts do mean a loss of income for the State. 

Generally as nationalists are not economists they do not understand the rational of giving a tax break to the business community. It is most unfortunate that Sri Lankans do not view entrepreneurship as positively as it deserves. Instead of appreciating the entrepreneurs and understanding the need to protect them, most Sri Lankans feel that benefit should go to the general public. 

However, taxes are also a form of currency. The ordinary citizen pays taxes to enable the Government to provide facilities and services that individuals are unable to provide for themselves. On the other hand, tax breaks allow entrepreneurs to contribute towards the economy in ways a Government alone cannot do. For instance, a growing business translates to more employment opportunities. A housing estate brings value to the property, allowing related businesses to thrive. 

The IMF views the tax breaks with a completely different eye to the ordinary citizens or Governments. The IMF’s goal is to push the Government into reducing its fiscal deficit. Though the IMF report mentions the need to reduce youth unemployment, their real focus is for the Government to collect enough revenue so as to pay off their financial commitments, including their own package to Sri Lanka. 

The fact that the IMF pins the blame almost solely on the pre-pandemic tax breaks therefore needs to be cautiously analysed. Its failure to factor the reasons that compelled the Gotabaya Administration to give the tax breaks in the first place is disturbing. During the All Party Conference called by President Gotabaya on the SLFP’s request, Cabraal summarised the reasons for Sri Lanka’s economy to suffer so much during the pandemic. 

He noted that during the period 2015-2019, our GDP growth gradually declined from 7 per cent to 2 per cent. Despite obtaining a staggering USD 15 billion as foreign loans, our FOREX reserves actually declined by USD 1 billion.  With the Easter Attack the tourism industry completely collapsed. The Sri Lankan rupee depreciated against the USD from Rs 131 to Rs 182. 

This summary stung Ranil Wickremesinghe, the Yahapalana Government’s Prime Minister. He complained that Cabraal was playing politics and if this blame game continued we will have to go all the way to Vijaya’s arrival. The President had to pacify the petulant politician. 

Curiously the Media only reported Wickremesinghe’s peevishness and President’s efforts to sooth his ruffled feathers. The more relevant information to the public as what this Government has done with our finances and reasons for the woeful economy capsulised by Cabraal was not reported. The Media’s failure infringed on the public’s right to decide whether Wickremesinghe’s charges held merit or was a clever political tactic to avoid explaining the reasons behind Yahapalana Government’s economic mismanagement. 

We need more than IMF’s short term solutions

Conversely Cabraal explained the reasons that had pushed Sri Lanka towards the IMF. He noted the vast and unusual expenses the Gotabaya Administration had to bear to face the unique challenges presented by the pandemic. 

The vaccination drive alone cost a whopping Rs 4,100 billion, Cabraal observed. This was at a time we lost the much needed revenue from tourism that yearly feed our coffers around USD 4.5 billion. Yet, this was an important investment as it has now allowed Sri Lankans return to more or less the pre-pandemic lifestyle. 

It is important to note here that the revenue from tourism was impacted by the Easter Attack, which was before the pandemic. Even though tourism began to pick up in late 2021, we had lost revenue from that avenue for three consecutive years. This means, our total loss is close to USD 12 billion. 

As the IMF notes, if tourism revives, then it would provide a relief to our economic woes. Every effort therefore must be provided to revive the tourism industry. This includes tax breaks and loan moratoriums to the tourist sector. 

In the short term these measures might be luxuries that the State cannot afford – especially at a time when we cannot afford our essentials. We however need to be more innovative than implement the IMF recommendations that will contribute to the State coffers only to be spent on imports. It is important that we understand that there is a gap between IMF’s priorities and ours. 

Who is responsible for pushing Sri Lanka towards the IMF? 

President Gotabaya’s decision to work with the IMF is a disappointing one. However, it is difficult to lay the entire blame on him alone. The uncomfortable truth is that we are all equally responsible for our current plight – including those trade unions that pushed for salary hikes or resolving anomalies despite receiving full pay, even during the lockdowns. 

Government rebel Udaya Gammanpila at a Media conference on March 16, 2022 directly accused Finance Minister Basil Rajapaksa for the shortages of fuel and gas. He noted that in 2021 our import bill was USD 20.6 billion. This is the highest recorded in history. However, for essentials as fuel, coal, gas, medicine and medical equipment only USD 4.6 billion has been spent. Almost USD 6 billion has been on non-essentials. It is unfortunate that despite the contracting economy, we as consumers allowed such a market to continue. 

However, Gammanpila revealed that the crisis we were heading towards was warned by Governor Cabraal to the Cabinet on 26 October 2021. Cabraal in his recommendations to avert this disaster had advocated a restriction on imports. Had the Government heeded that advise today people would not be suffering, charged Gammanpila. 

Cabraal on the other hand observed in his summary to the APC that livelihood is as important as lives. Just as Basil Rajapaksa cannot escape from the damning accusations leveled at him by Gammanpila, Cabraal’s observation lays a portion of the responsibility on Gammanpila et al’s feet. 

It must be recalled that when the Cabinet decided against the third lockdown, it was a section of the Government who now represent the rebel faction that sent a public letter to the President advocating a lockdown. They argued that lives are more important than livelihoods. President immediately complied. However, he noted that this lockdown was one the country could  ill afford. Cabraal noted at the APC that our opportunity cost from the lockdowns is over Rs 1,000 billion in terms of economic activities. President warned that if the dire economic conditions continue we would all have to make sacrifices. Today, his warning has become a reality. 

Cabraal also noted that expatriate workers’ reluctance to remit and exporters hoarding their USD earnings aggravated the problem. Those who earned an extra buck by channeling their monies through the black market must be gleefully counting their profit in the dark. At the same time those responsible for the country’s finances are answerable for their failure to eradicate this black market that has a stranglehold on our economy. 

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