“The government is not thinking of any alternative”: An Interview with Ahilan Kadirgamar

By Umesh Moramudali

Alliance for Economic Democracy (AED) is an organization formed by a group of persons who insists upon the importance of economic justice. Ceylon Today interviewed Ahilan Kadirgamar, a member of the AED, who in the course of the interview insisted how the possible outcomes of the IMF Agreement hurt the ordinary people of the country. Very often, when tax increases are suggested it is the indirect tax such as Value Added Tax (VAT) that increases, which hurts the public. Most importantly, in Sri Lanka 80 per cent of tax revenue come from indirect taxes such as VAT. That means the ordinary people will pay for it. It seems that, it is the ordinary people who pay for the government’s economic mismanagement, of the country.

Following are excerpts of the interview:

?: You have been very vocal about the loan from the International Monetary Fund. What are the reasons behind your strong opposition to this IMF loan?

A: Before we come to the IMF Agreement, we should understand why the government had to go for this agreement. There was an economic crisis that pushed us towards it; a lot of people interpret this as a Balance of Payments (BOP) crisis. In other words the country does not have sufficient foreign reserves to pay for all our imports. That means our exports do not bring sufficient revenue to fill the expenditure for imports. Then it becomes a crisis.

This government introduced a mini Budget in 2015; and then came up with the Budget 2016 in November. By then elections were over; they could have addressed all the economic issues through the Budget 2016, but they did not. By March they suddenly said we are in an economic crisis. They said that we do not have sufficient foreign reserves and our debts are too high and our revenues are too low. The question is, why were they not aware of this when the Budget 2016 was prepared. They came up with Amendments to the Budget and increased the VAT.

The Government of Sri Lanka entered into an agreement to obtain a loan of US$ 1.5 billion with the International Monetary Fund (IMF) in June 2016. In addition, loans worth US$ 650 million were raised via bi-lateral and multi-lateral donors including the World Bank (WB) and Asian Development Bank (ADB). Under this Extended Fund Facility Agreement, the IMF is prescribing medium-term structural reform policies for Sri Lanka. While the conditions proposed by the IMF will have far reaching impact on the Sri Lankan economy, there has been very little public discussion about it.

The issue is, why the government was not prepared for such a crisis? The problem with the IMF Agreement is that the conditions of the IMF Agreement will be reflected in the Budget 2016. That will not be beneficial to the ordinary people in the country as there will be a lot of austerity measures.

?: In the context of opposing the option of going for a IMF loan, what is the alternative you suggest?

A: The question here is that the crisis hit us in March; what was the government doing from November to March to prevent such a crisis. In fact, the government through Budget 2016 made it much easier for imports to come into the country including luxury items. That was what led to a very large import bill which subsequently resulted in the BOP crisis. If they wanted to address this crisis, the government could have reduced imports and increased our exports. However, no action was taken to do so. Increasing exports takes a long time, but reducing imports is something we can do in the short run. Yet, the government did not do that. As we see the government does not have a clear policy on trade or industry. There is no proper strategy regarding increasing exports or reducing imports. The government just follows the neoliberal ideology of trade liberalization. While we are in this crisis what we do is expanding the trade liberalization which increases the chances of future BOP crisis. If imports increase again we will again face the same crisis. The crisis is also linked to the massive loans taken. It is true that most of these loans were obtained by the Rajapsksa Government, but this government is not doing anything different. After the IMF Agreement, it had made it easier for our government to obtain more and more loans; and the government did so. Recently, the government sold sovereign bonds for US$ 2 billion. They are not thinking of any alternative. The government is not thinking about economic reforms to increase exports or reduce debts.

?: Do you think that the government has any long-term plan to address BOP crisis?

A: There is no long term plan of the government to address the BOP crisis. The previous government too did not have one; I will talk about two first conditions of the IMF Agreement. First one is raising tax revenue and the other was to bring down the Budget deficit. Both these targets are fiscal targets and both are not directly related to the BOP crisis. In economics we call this a twin deficit. BOP deficit is about current account deficit affiliated to external trade. Budget deficit is mostly about the government revenue and expenditure. As a result of this the people too are confused. IMF is using the BOP crisis, to urge the country to reduce the Budget deficit and increase revenue.

How such revenue does it generate? Taxes imposed on ordinary people, most often tax increase is suggested. It is the indirect tax such as VAT that increases, which hurt the public. Most importantly, in Sri Lanka 80 per cent tax revenue comes through indirect taxes such as VAT. That means the ordinary people will pay for it. It seems that for the government’s mismanagement of the economy, the ordinary people will have to pay.

If they do not increase the revenue, the government will have to bring down the expenditure in order to reduce the Budget deficit from 6 per cent of the GDP to 3.5 per cent. When the government cut the expenditure it is likely that they will cut funding for education, health or the Samurdhi payments. Again the ordinary people pay the taxes. As we do not have a proper plan to address the BOP crisis in the long term, in a few years the government will ask the people to pay more taxes again. In that context, we are caught in a trap.

In 2009, Mahinda Rajapaksa went with the IMF Agreement and in seven years we find ourselves in the same crisis again.

?: Although you criticize the IMF, the reason for setting up the IMF was to provide assistance to countries to overcome BOP crisis. In that context, the option was picked up by the government. Doesn’t it seem to be correct?

A: The IMF is insisting on several structural changes in the years ahead, including the consolidation of the fiscal deficit to 3.5 per cent of GDP by 2020, increasing taxes, restricting public expenditure, reforming state-owned enterprises, liberalising trade and deepening financialization. At the outset, these recommendations may seem necessary and even beneficial to the country. However, these solutions result in increasing the economic burden on the people.

The IMF and the World Bank were formed soon after the end of world war, in 1944, at the Bretton Woods Conference. The initial mandate of the IMF was to address short-term inconsistencies in the balance of payments and foreign exchange rates. The WB’s role was to enable reconstruction and development through long-term loans. However, with the breakdown in the Bretton Woods Agreement in 1970s and abandoning of a pegged foreign exchange system and the gold standard, the IMF and the WB took on a new agenda and new roles. Together, the IMF and the WB began dictating structural economic reforms to countries. The mandate of the IMF had changed after the so called Washington Consensus. Now the IMF acts beyond its mandate. For example, the IMF is advocating for trade liberalization which is none of their business.

For example, instead of increasing direct taxes (i.e. income taxes, corporate taxes and capital gains tax) which target the rich, taxes affecting ordinary people, like the recent VAT increases, are imposed. Similarly, while reforming loss making State owned enterprises may seem essential, they are transformed to operate as commercially focused private companies, including allowing electricity, fuel and water to reflect market prices, disregarding how it might affect the people. Can fishermen cope with the sudden fluctuations in market prices of kerosene to run their boats? The IMF encourages Free Trade Agreements and facilitation of foreign investments and loans. However, workers’ wages and labour rights are threatened by such moves. While liberalisation of capital flows and deepening of financial markets are encouraged, no consideration is paid to the cost of capital flight and the financial crisis. Furthermore, the aggressive fiscal consolidation targets set by the IMF are likely to restrict the Budget for 2017, with cuts to spending on essential services.

Such IMF interventions have been based on problematic assumptions. Firstly, the inevitability of neoliberal globalization; particularly, the free flow of capital and goods, along with a floating foreign currency. Therefore, the IMF sanctioned liberalisation of capital markets and trade led to increased global flows of capital and goods, with tremendous market fluctuations.

?: While insisting upon increasing tax revenue, has the IMF insisted upon increasing indirect taxes? If not, does the government have the option of increasing direct taxes?

A: What IMF has insisted upon is, is the increase of revenue and they have not mentioned about increasing indirect taxes. In fact, IMF itself notes that the indirect taxes are very high in Sri Lanka. IMF also stated that the government expenditure in Sri Lanka is not too high; it is the revenue that should go up. But they put strict conditions to reduce the Budget deficit, and then what does the government do? They just increase indirect taxes and take the easy way out.

Recently, a research conducted by a few IMF researchers also highlighted the danger of neoliberal policies. In the article ‘Neoliberalism oversold’ it was noted that the evidence of the economic damage from quality suggests that policymakers should be more open to redistribution than they are. Of course, apart from redistribution, policies could be designed to mitigate some of the impacts in advance – for instance, through increased spending on education and training, which expands equality of opportunity (so-called predistribution policies).