Sri Lanka finesses its IMF loan

Throughout 2008 the economy of a small Asian country falls further and further into the mire. Its government decides to apply for a substantial rescue loan from the IMF.

Over the long and difficult year leading up to the IMF Executive Board decision, these are some of the steps taken by this enlightened government to enhance its prospects of approval:

  • Increase military expenditure towards 20% of the national budget
  • Abandon peace initiatives to end a civil war
  • Tolerate a culture of assassination of political opponents and journalists
  • Allow civilians caught up in the fighting to come under fire, a war crime according to Amnesty International
  • Intern 280,000 civilians in camps, contravening international law
  • Refuse access to humanitarian agencies
  • Tell the Norwegians that they are not fit to manage peace negotiations
  • Refuse a visa to the Swedish foreign minister, prompting permanent closure of the embassy
  • Indulge in a shouting match with the British foreign secretary, confining police to barracks whilst the British embassy is trashed by protesters

This charm offensive claimed its reward on Friday last week with the news that the IMF has approved a whopping $2.6 billion stand-by loan for Sri Lanka. The decision was carried despite a rare abstention by the British government. Unconfirmed reports suggest that US, France and Germany also abstained.

A few years ago the opposition of four of the five largest shareholders would probably have resulted in suspension of IMF relations. A loan would have been out of the question. What’s going on?

Like it or not, as economic power sails inexorably eastwards, traditional western values are being cast overboard. This grubby financial rescue may become a milestone in this passage, reflecting new realities:

  • China is prepared to back strategic allies with votes and cash
  • India is forced to match China’s support of Sri Lanka in order to sustain its regional leadership
  • The IMF is moving towards a broader governance model, as countries such as China and Brazil take on a greater burden of funding. Although the rules remain the same for now, the voting psychology anticipates the changes.
  • Under pressure from poverty campaigners, the IMF has very recently agreed to relax structural and other loan conditions which interfere with sovereignty. Although such conditions have not normally encroached on human rights territory, it’s a bad moment to tell a borrower how to run its country.
  • The Sri Lankan military has just eliminated one of the world’s most effective terrorist groups, in contrast to the efforts of US and NATO forces in Afghanistan.

In manipulating this shifting scenery the Sri Lankan government has outwitted its hectoring opponents. Rarely has a Human Rights Watch press release fallen on such stony ground.

Nonetheless this story may have further to run. My guess is that there will be strings attached to the loan, whatever the IMF’s promises about streamlined conditionality.

And there’s a very curious directive in the IMF announcement to the effect that Sri Lanka must rebuild “a strong macroeconomic foundation that will help the authorities approach the broader international community for financial support in post-conflict reconstruction.”

Never mind the macroeconomics; it’s diplomatic relations with the west that will need rebuilding before the trusty old channels of aid start flowing once again.


this article was first published by OneWorld UK