Sri Lanka is going on bended knees to the International Monetary Fund (IMF) - an institution it chased away two years ago - for a bailout package worth US$1.9 billion as the country's authorities scrape the barrel for foreign exchange.
Sri Lanka's economic crisis is two-fold: sagging export income and the Central Bank using the few dollars it has to intervene in local money markets to defend the rupee from depreciating against the US dollar.
At the same time, the government's access to cheap commercial borrowing from foreign sources to fund the costly war against separatist Tamil rebels and other state expenses has dried up with the global financial meltdown.
Last week, the government took the plunge and announced it was in negotiations with the IMF for a $1.9 billion standby arrangement.
Central Bank governor Ajith Nivard Cabraal - who has been criticized by economists and opposition legislators for misleading the country on the state of its finances - was quoted as saying: ''The offer was made for a facility without conditions. We didn't think we needed it but then this happened to be a good opportunity.''
The country had $1.7 billion in gross official reserves at the end of December, sufficient just for 1.5 months of imports, compared with more than $3.5 billion a year earlier.
Senior economist Sirimal Abeyratne from the University of Colombo told Inter Press Service (IPS) that the financial crisis is so acute that Sri Lanka had few choices. ''Otherwise, why ask for money if we have money, particularly from an institution [IMF] that the government didn't want,'' he said.
Dushni Weerakoon, senior economist at the Institute of Policy Studies, said Sri Lanka's main problem has been the ''outflow of foreign exchange last year following the global economic crisis and using whatever resources we have to defend the Sri Lanka rupee in local money markets''.
She told IPS that in addition to an outflow of $600 million after foreigners withdrew money in central bank bonds in the second half of 2008, the bank has been pumping some $200 million a month (in the last three months of the year) in an unsustainable exchange rate policy to prop up the rupee.
Sri Lanka last year kept its exchange rate at about 108 rupees to the US dollar until October 2008 as the government sought to slow inflation. The rupee has since dropped to about 114.30.
The move to return to the IMF for emergency cash comes after the government virtually threw the organization out of the country in January 2007, with the IMF closing its Colombo office, saying it had no program left.
The opposition and economists at that time said the government had come under pressure from hardline partners like the JVP (People's Liberation Front) and the JHU, formed mainly by Buddhist monks, who frowned on Western-led multilateral agencies like the IMF or World Bank and their tough, conditional lending.
Loans from the IMF, generally seen as a lender of last resort, generally come with conditions such as demands for a reduced budget deficit, cuts in government spending, tighter monetary policy and a flexible exchange rate policy, which would allow the rupee to float freely against major currencies.
Economists said much of the Sri Lanka's spending, particularly on the military, came from domestic borrowings and when that dried up, it came from foreign borrowings from commercial sources, and China and Iran.
Sri Lanka has been relying on China for political and economic support after turning away from the once-favoured West, which has been repeatedly critical of the government in Colombo over human-rights violations.
Early last year, before the global crisis, the government was so gung-ho about the access to cheap credit from commercial sources that one powerful Finance Ministry official told a senior World Bank staffer: ''We don't need your conditional money. We have access to cheap credit without conditions.''
With foreign reserves fast dwindling, the central bank, whose governor is a political appointee and former advisor to President Mahinda Rajapaksa, in February, announced two measures to shore up reserves: raising $500 million from Sri Lanka's diaspora and currency swaps with other central banks in the region. However neither has worked as expected.
Economist Abeyratne said Sri Lanka was in a debt trap, where one had to borrow to pay off debts. ''We are down to our lowest levels. Diaspora funds have not come as expected. Last year, the government paid close to half a million dollars in debt payments and this year it will be higher. So we are borrowing to pay off our debt - which is where part of the $1.9 billion IMF facility will go.''
Weerakoon said the debt payments will increase this year once some central bank bonds expire and payments are made. There was also payment to be made to Iran for an oil credit line, she said. ''There is quite a list of payments.''
Sri Lanka's economic crisis is two-fold: sagging export income and the Central Bank using the few dollars it has to intervene in local money markets to defend the rupee from depreciating against the US dollar.
At the same time, the government's access to cheap commercial borrowing from foreign sources to fund the costly war against separatist Tamil rebels and other state expenses has dried up with the global financial meltdown.
Last week, the government took the plunge and announced it was in negotiations with the IMF for a $1.9 billion standby arrangement.
Central Bank governor Ajith Nivard Cabraal - who has been criticized by economists and opposition legislators for misleading the country on the state of its finances - was quoted as saying: ''The offer was made for a facility without conditions. We didn't think we needed it but then this happened to be a good opportunity.''
The country had $1.7 billion in gross official reserves at the end of December, sufficient just for 1.5 months of imports, compared with more than $3.5 billion a year earlier.
Senior economist Sirimal Abeyratne from the University of Colombo told Inter Press Service (IPS) that the financial crisis is so acute that Sri Lanka had few choices. ''Otherwise, why ask for money if we have money, particularly from an institution [IMF] that the government didn't want,'' he said.
Dushni Weerakoon, senior economist at the Institute of Policy Studies, said Sri Lanka's main problem has been the ''outflow of foreign exchange last year following the global economic crisis and using whatever resources we have to defend the Sri Lanka rupee in local money markets''.
She told IPS that in addition to an outflow of $600 million after foreigners withdrew money in central bank bonds in the second half of 2008, the bank has been pumping some $200 million a month (in the last three months of the year) in an unsustainable exchange rate policy to prop up the rupee.
Sri Lanka last year kept its exchange rate at about 108 rupees to the US dollar until October 2008 as the government sought to slow inflation. The rupee has since dropped to about 114.30.
The move to return to the IMF for emergency cash comes after the government virtually threw the organization out of the country in January 2007, with the IMF closing its Colombo office, saying it had no program left.
The opposition and economists at that time said the government had come under pressure from hardline partners like the JVP (People's Liberation Front) and the JHU, formed mainly by Buddhist monks, who frowned on Western-led multilateral agencies like the IMF or World Bank and their tough, conditional lending.
Loans from the IMF, generally seen as a lender of last resort, generally come with conditions such as demands for a reduced budget deficit, cuts in government spending, tighter monetary policy and a flexible exchange rate policy, which would allow the rupee to float freely against major currencies.
Economists said much of the Sri Lanka's spending, particularly on the military, came from domestic borrowings and when that dried up, it came from foreign borrowings from commercial sources, and China and Iran.
Sri Lanka has been relying on China for political and economic support after turning away from the once-favoured West, which has been repeatedly critical of the government in Colombo over human-rights violations.
Early last year, before the global crisis, the government was so gung-ho about the access to cheap credit from commercial sources that one powerful Finance Ministry official told a senior World Bank staffer: ''We don't need your conditional money. We have access to cheap credit without conditions.''
With foreign reserves fast dwindling, the central bank, whose governor is a political appointee and former advisor to President Mahinda Rajapaksa, in February, announced two measures to shore up reserves: raising $500 million from Sri Lanka's diaspora and currency swaps with other central banks in the region. However neither has worked as expected.
Economist Abeyratne said Sri Lanka was in a debt trap, where one had to borrow to pay off debts. ''We are down to our lowest levels. Diaspora funds have not come as expected. Last year, the government paid close to half a million dollars in debt payments and this year it will be higher. So we are borrowing to pay off our debt - which is where part of the $1.9 billion IMF facility will go.''
Weerakoon said the debt payments will increase this year once some central bank bonds expire and payments are made. There was also payment to be made to Iran for an oil credit line, she said. ''There is quite a list of payments.''
[Edited for Brevity]
