Since joining the International Monetary Fund (IMF) in 1950, Sri Lanka has obtained IMF support to overcome Balance of Payment (BOP) crises on 20 occasions. From securing its first gold tranches in 1961/62 valued at over USD 107 million to the latest USD 2.9 billion bail-out package in 2023, Sri Lanka has maintained a good track record of falling into periodic BOP-crisis situations accompanied by “successful missions to IMF” as jubilant media often report.   

The main purpose of the IMF is to help member nations face external balance or BOP difficulties, so that global trade and investment flows may continue without disruptions. From Sri Lanka’s example of periodically falling into a BOP crisis, one might wonder if IMF-prescribed solutions (or terms and conditions attached to IMF funding) ever help small nations like Sri Lanka to achieve long-term BOP stability. Just like any conventional banker’s objective of recovering the bank loan, and reducing the risks of the borrower during the tenure of the loan, IMF programs also appear to have a similar orientation.   

Questionable IMF prescriptions

When we examine the economic history of Sri Lanka, it is not difficult to understand that the main cause of the instability of the Sri Lankan economy is its inability to generate enough foreign income to sustain itself. And being an import-dependent country, the Sri Lankan economy cannot expand (in a sustainable fashion) without corresponding increases in sustainable foreign inflows. But do we ever hear any IMF-prescribed remedies to at least reduce the importing of unnecessary consumer goods? Do we ever hear any measures to accelerate target exports to help support foreign income? Do we ever hear IMF proposals to reduce dependency on food imports?   

But we do hear (a lot) about IMF-prescribed mantras to privatize state-owned enterprises (SOEs), liberalize trade, etc. – the very measures that may lead to further deterioration of BOP in countries like Sri Lanka. For example, if Sri Lanka does privatize a profitable SOE to foreign investors, it is a no-brainer that such a sale will further deteriorate BOP due to high levels of profit and other forms of (cash) repatriations – especially given Sri Lanka’s BOP is already highly impacted by high levels of profit repatriations for years. In 2022 alone, over USD 400 million has been taken out of the country in the form of dividends by FDI ventures.     

Interestingly, Dr N M Perera, the leader of the opposition at the time Sri Lanka obtained the IMF membership, cautioned Sri Lanka on the merits of joining the IMF. He stated during the parliamentary debate on joining IMF that “Sri Lanka may become subservient of the dollar imperialism, and help the US strengthen its dollar positions around the world.”  A view echoed by prominent US economist Fred Bergsten five decades later during a testimony before the Joint Economic Committee of the US Congress. Bergsten stated that “The national interests of the United States are strongly supported by the IMF.” He further added that “IMF is one of the best possible deals we could ever imagine: its programs cost us nothing yet it provides enormous benefits for our economy and our foreign policy.”

(The author is a Colombo-based Independent Private Market Investment professional. Views are personal. He can be contacted at indika.h@jupitercapitalpartners.com )