By Harsha Gunasena –
Harsha Gunasena
Ahilan Kadirgamar (hereinafter referred as AK), whose colourful academic credentials i.e., bachelor’s degree in electrical engineering, master’s in economics and a doctorate in anthropology would impress anyone, has written an article titled “Kenya to Sri Lanka: Protests, IMF and High Ambition” to the Daily Mirror published on July 1, 2024.
I have written this reply to Daily Mirror but I thought of sharing this with Colombo Telegraph readers as well.
AK basically criticized the respective IMF programmes in Kenya and Sri Lanka and was in the verge of predicting that Sri Lanka also will face riots similar to Kenya.
There were certain misinterpretations in the article of AK and the intention of this article is to address those points.
“The demands of the Kenyan movement now for the resignation of their president echoes what we heard here all over Sri Lanka, resulting then in the flight of President Gotabaya Rajapaksa.” This statement by AK is literary correct but the causes for the two incidents were completely the opposite. The former was associated with the solution and the latter was associated with the problem.
We will examine why the so-called solution had to meet stiff resistance from the people during the latter part of this article. Prior to that there are a few points which should be clarified. AK stated the following in the latter part of his article. ”The political opposition in Colombo waiting for the elections later this year need to wake up. If they cannot come up with an alternative to the IMF path of so-called economic recovery, their political future may end up the same as in Kenya.”
Both the main opposition parties SJB and NPP stated that they would continue with the IMF programme but both of them stated that they would renegotiate the agreement with the IMF. To my knowledge they have not clearly mentioned the areas they would renegotiate with the IMF and to what extent. In response to these claims IMF Sri Lanka Mission Head Peter Breuer responded in a press conference as follows “So, I mean, more broadly speaking, with respect to, you know, proposals, as I said before, we’re willing to listen to different views of how the program objectives can be reached, and these need to be realistic and achievable within the timeframe of the program. So that’s very important.”
Gotabaya Rajapaksa’s regime was against asking the help from the IMF which was clearly spelled out by Nalaka Godahewa prior to the elections, and it was clearly carried out by Nivard Cabraal, the political appointee to the Governorship of the Central Bank, who was more vocal than the Minister of Finance, during the crisis. Cabraal stated that he had a home-grown solution to the crisis rather than asking the help from the IMF. Had they asked that help prior to the bankruptcy Sri Lankan public would not have faced such a disastrous situation. What did Cabraal do? He dealt with the Central Banks of India and China and arranged currency swaps. That was the home-grown solution which was not adequate to rescue Sri Lanka.
If the NPP does not have an alternate solution to the IMF, why do not AK and the rest of the similar minded economists put forward an alternate solution and then all of us could debate and if acceptable we all can push the Presidential candidates to accept and adopt it.
I do not agree with the foreign policy of the USA or that of Russia or that of any other powerful country since naturally my perspective is the Sri Lankan perspective. However, there could be certain alignments on those different perspective at different times and such alignments may have led to the so-called high ambition rhetoric referred to by AK.
AK says “That such financialisation is at the root of the current wave of sovereign debt crisis was propelled by commercial borrowings in international capital markets is not a consideration (for Washington or for the IMF)”. Not really. The root of the wave is arrogance and lack of financial literacy at the highest levels of the governments resulted in the negligence of the basics. One cannot blame Wall Street for that.
The statement of AK can be examined further in the Sri Lankan context since there is a link between financialisation and debt crisis. Sri Lanka was upgraded to lower middle-income country in 1997 and as a result Sri Lanka lost access to most concessional financing which means loans with lower interest rates and longer repayment periods. Sri Lanka issued first International Sovereign Bond(ISB) in 2007. Politicians and the top rank government officials are happy with these loans since those loans although come with higher interest rates and shorter repayment periods, equally associates with no conditions. Mahinda Rajapaksa’s government prevailed at that time promoted domestic infrastructure and consumption driven growth with the ISBs and China Exim Bank loans. The top Ranks of that government looked down upon the institutional and bilateral loans with low interests and more conditions. That was one reason why the light rail project of Japan was stopped abruptly during the time of Gotabaya Rajapaksa.
AK also says, “It is futile to pursue the IMF’s path of debt resolution, as the IMF’s interests are aligned with those of the creditors and the West.”No. IMF interests are aligned with the fundamental interests of the borrowing country. If and only if the borrowing country is financially stable the IMF loan and the other loans can be repaid. IMF is not involved in the debt restricting negotiations which would result in writing off a portion of the loans (haircuts) and/or lowering the interest rates and/or prolonging the repayment period. After the restructuring the agreed amount should be paid or else that country can remain an outcast to global financial transactions and go back to an ala bathala economy.
What happened in Kenya? Willium Ruto became the Kenyan President in 2022 and the IMF support schemes namely Extended Fund Facility(EFF) and Extended Credit Facility(ECF) were requested and approved during the time of previous President Uhuru Kenyatta in 2021. The International Criminal Court (ICC) opened an investigation of post election violence of 2007-08 against both Ruto and Kenyatta. Ruto’s aggression against the recent peaceful demonstrators was widely condemned.
Kenya like Sri Lanka was facing prolonged twin deficits i.e. budget deficit and current account deficit. IMF is not at fault for having these deficits. As a result of these deficits the debt of Kenya got piled up. Then Kenya requested the assistance of the IMF. Not that IMF voluntarily offered helping Kenya.
In Kenya there is no free health care in comparison to Sri Lanka. Many government hospitals offer free or low-cost medical services. These services often cover essential health care, maternal and child health services, and treatment for certain diseases. There is medical insurance scheme and free community health care programmes organized by NGOs are in operation. University education in Kenya is not free. There are certain concessions in government universities. Kenya is a lower middle-income country but the challenges of poverty and income inequalities remain. In 2019 almost one third of Kenyans (33.6%) were living below the poverty line.
The EFF and ECF programme objective in relation to Fiscal policy was to undertake growth-friendly fiscal consolidation to preserve debt sustainability by bolstering revenue primarily through broadening of the tax base and curtailing overall spending while prioritizing high-impact social and investment expenditure. Primary balance of the government budget which means total income minus total expenditure other than interest payments and loan repayments was negative and the intention was to make it positive by increasing the revenue and reducing the expenditure.
Prior to the grant of the IMF facility Kenya increased the maximum income tax from 25% to 30% and the VAT rate from 14% to 16%. This was a reversal of previous tax cuts. The ratio of Kenyan Income Tax revenue to VAT revenue was 62:37. In the projections also they maintain the same proportion. This is quite contrary to the Sri Lanka situation.
This may be due to the fact that considering the higher income inequality and higher poverty rate.
However this consideration was reversed in the Finance Bill 2024 where bread was subject to 16% VAT among several other products which was previously exempted. In addition to that the government introduced 25% exercise duty on cooking oil and as a result the price of cooking oil was increased by around 80% in the retail market. In respect of imported sugar, the current exercise duty of KES 42.91 per kg was increased to KES 257.55 per kg. In respect of Income Tax there were no drastic changes, but certain tax exemptions were removed. There was no increase of Income Tax rate. The impact of these changes on the national budget would surely change the Income Tax to VAT ratio. Income Tax is paid by those who can afford to pay, and VAT is paid by all the consumers. If VAT is increased on essentials in a country where there is a higher poverty rate, it will eventually lead to social unrest.
A government should be prudent and should know where to collect the taxes and where to cut the expenses in order to strengthen fiscal stability. When things go wrong one cannot blame the IMF or Washington for that. Therefore, one cannot predict that what happened in Kenya will happen in Sri Lanka as well.
published in Colombo Telegraph on 10 July 2024
https://www.colombotelegraph.com/index.php/will-what-happened-in-kenya-happen-in-sri-lanka/
/ July 11, 2024
7
0whywhy,
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If Kristalina Georgieva said that the IMF conditions need not pass onto the bulk of the people, it means that a plan to tax the monied-elite is also fine with them. Ranil building up commercial venture in the midst of bankruptcy for future Generation-2048, will only heap even more debt onto Lankan parents and grandparents, and most probably pass onto this future generation as well. Debt will never be paid back.
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NPP and Anura, thus sanctioned by the IMF, will tax the wealthy, spread the wealth, and by 2028, then and only then restart the commercial venture. All will be far more successful that way. Country money will stay in-country, and we won’t have to sell ourselves to India, China, US, Japan et al. to sustain.
/ July 11, 2024
2 1ramona therese fernando
“it means that a plan to tax the monied-elite is also fine with them”- definitely. Property tax will be coming next year. I do not know why it was delayed.
“NPP and Anura, thus sanctioned by the IMF, will tax the wealthy, spread the wealth, and by 2028, then and only then restart the commercial venture.” – Let them come up with a plan. How to earn and how to spend. We will discuss it at that point.
/ July 11, 2024
3 4Harsha Gunasena,
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Ranil will only tax the suffering working class who have high home mortgages. Ancestral homes and millionaire businessmen property won’t be taxed as Ranil is depending on their monies to magically create the commercial venture that usually looks after their solely exclusive lifestyles and untaxable offshore accounts./ July 12, 2024
2 1ramona therese fernando
How do you know? When Ranil increased the upper limit of income tax to 36% NPP and the others objected. They said taxes were too high and wanted to reduce it. They were not specific. They could have said to increase the lower tax limit of 100,000 and widen the tax brackets but they were targeting the upper limit of 36%. If it was reduced the high income groups would be benefited. There was huge protest against income tax increase. I have spoken in favour of tax increase.
When the VAT was increased and widened there was no big protest. NPP and the others were silent. Common people were affected by this. NPP could not say that the government agreed rate of VAT with IMF was 15% although the government increased it to 18%. I have raised this issue. https://www.youtube.com/watch?v=P9Z3P8Qmbgw&t=1sNPP was invaded by middle-class professionals who are no different to Viyathmaga and who think that all the evils will be eroded by catching thieves.
NPP is focusing on to maintain state run ventures. Those should be privatized and the wealth concentrated in the state should go to the private sector in order to have a higher growth.
/ July 12, 2024
1 1Harsha Gunasena,
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Zero taxation on the monied elite IS Ranil’s top policy.
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But I was speaking about capital gains tax of 35% and more on sale of property+ 35% migration tax. Also that the offshore accounts be divulged and taxed. All the other taxes you mention are only skirting around these main taxes. Only a radical change of government can achieve this./ July 13, 2024
1 0ramona therese fernando
maximum income tax rate was increased to 36% from 1.1.2023 under Ranil.
Capital gains tax was reintroduced from 1.4.2018 under Ranil.
Property Tax is going to be introduced in 2025 planned under Ranil.
Therefore monied elite is not zero taxed under Ranil.
Interest on foreign currency accounts are free from income tax.
Highest revenue earners of any country are income tax and VAT or GST and not capital gains tax or migration tax.
If you say income tax and VAT are skirting around the main taxes of capital gains and migration tax, it is not correct./ July 13, 2024
1 1Na….for the Ranilian policies, maximum income tax rate, capital tax, and property tax are not part of the taxation for the monied elite. VAT and GST are sneaky taxes targeting the poor. But if the other taxes on the elite are actually implemented, country will not need these sneaky taxes. Ranil needs the elite offshore accounts, you see, to plan the India merger. Only NPP will actually implement the income, capital, and property taxes for all, with resonable VATs and GSTs….no need of an India merger with them.
/ July 10, 2024
7 2The NPP will phase out the dependent relationship we had with the IMF, having requested help on around 38 different occasions so far. This is because no country that had a dependency with the IMF and WB became developed countries (both the IMF and WB are not in the least compassionate entities whose mission is to help but mere extensions of US global hegemony). This is one of the main reasons why a fundamental change in attitudes, national governance and political structure are critically needed. The game that seasoned rascals and their criminal cabals played for many decades must come to an end this year.
/ July 11, 2024
3 2Lasantha Pethiyagoda
Sri Lanka has gone to the IMF in 16 times previously. In many occasions Sri Lanka has withdrawn from the respective programmes in order to accommodate populist thinking. For instance India went to the IMF seven times but after 1991 in which year they have carried out economic reforms they did not go to the IMF. Now India is a great economy. If we can do the reforms this time we may mot have to go to the IMF once again./ July 10, 2024
3 2The author is missing the essence of AKs comment.
It is abut the plight of two countries caught by their b***s by the IMF. How they did is a detail./ July 11, 2024
7 1SJ
The IMF is saying to increase the income and reduce the expenditure. This is common sense. What is wrong with this? They are not here to suggest the ways to accelerate our growth and improve the exports./ July 11, 2024
2 6What expenditure and what income decide to whom it makes sense.
The IMF has been nowhere to help anyone but imperialism/ July 12, 2024
0 1SJ
Could you be specific please. IMF does not say what expenditure to reduce and what income to increase. It is up to the government. Why don’t you visit the IMF website and let us know what proposals help imperialism? Does Aswesuma help imperialism?/ July 12, 2024
2 1You should know better about IMF prescriptions.
Have you no idea of their conditions and whom they are deigned to hurt?
Governments have little say when they get stupid enough to rely on the mercy of the IMF.
IMF is interested in two things : (1) making sure thar we pay all loans with interest and (2) making sure that we will keep paying./ July 13, 2024
2 1SJ
You are just uttering dogmas.
You say IMF is interested in making sure that we pay all loans with interest continuously.
Role of IMF is to support the government to negotiate with the lenders to agree on loan balance which could be repaid over a period of time and to support the government to arrange its internal position for that. This role is not directed at safeguarding the creditors. If we do not wish to pay the creditors we could have done it when we defaulted. Sumanasiri Liyanage suggested it. Declare that we will be not paying the loans and become a pariah state. Then we can be an isolated state and no letters of credits even.
Even then we have to spend out of our income only which is promoted by the IMF now.
If you think that any lender would help us to default the pervious lenders, and if not it is imperialism, it is not correct
Ratnam Nadarajah / July 10, 2024
Dear Lasantha
I have not read the article fully. However, I am penning a few lines
I know a little about IMF and WB politics and little about its policies.
The late PM of Singapore Lee Kuwan summed it in few words ” we know better about our needs better than any of you, so please do not preach your gospel on third world economies” words to these effects.
Yes, RW jumping into bed with IMF in a hurry is expected but not the best option. But again beggars can’t be choosers. Did he have a choice? May be selling more of our destiny to the Chinese. I am no expert on this either
More later
Ratnam Nadarajah
Harsha Gunasena / July 11, 2024
Ratnam Nadarajah
You better read the article and then comment.
Yes. Lee knew better than anyone else about his country and he was not subject to cheap populist economics. We do not know about our country and that was why we are bankrupt today caused by a populist President.
Ajith / July 11, 2024
Harsha,
Yes IMF is saying to increase the income and reduce the expenditure but you don’t need IMF to tell this. It is a simple economics. Revenue – Expenditure = + is positive, – is negative.
Then why should they put the nasty conditions to the loan?
Harsha Gunasena / July 12, 2024
Ajith
What are those nasty conditions. All these are available in IMF websitehttps://www.imf.org/en/Countries/LKA
Mahila / July 11, 2024
Harsha,
Absolutely nothing wrong in that concept!!!???
Except, Except, (repeat for emphasis) such action wouldn’t Garner Votes!!!??? Make Politicians “Unelectable Quantity”!!?? That is Difficult!!!?? Like, Trump telling Governors to find 11,000+ votes after voting and counting!!??? That may be resorted to, by our very Intelligent, Nay Cunning Political elite, to overcome the Impasse and gain seats in Parliament!!?? Political INFLUECE!!??
Harsha Gunasena / July 12, 2024
Mahila
Yes such actions would not garner votes. Voters can decide now whether they want to go towards another bankruptcy or whether they want to go out of it.