Brussels (08/11 – 50)

On March 20, the IMF approved a $3 billion Extended Fund Facility (EFF) to support Sri Lanka amid its economic crisis. The approval is expected to pave the way for other financial institutions to extend support to the bankrupt South Asian country. IMF program was made possible largely due to the untiring efforts of the President Ranil Wickremesinghe.

The IMF links financial assistance to a country to policy reform, a conditionality that usually imposes political as well as economic changes in the recipient nation. The logic behind IMF conditionality is multifold. It is supposed to prevent moral hazard by governments that receive loans. These conditions allow the IMF to monitor the behavior of the recipient states and allegedly promote best practices and good governance.

Sri Lanka has been to the IMF 16 times before; five of these since 2000. The full amount of the IMF loan was not disbursed on six occasions because Sri Lanka did not fully comply with the conditions of the loans. This included the previous EFF in 2016, when the conditions imposed by the IMF built additional pressure on the domestic economy. There has been much skepticism about Sri Lanka adhering to the more stringent IMF conditions this time around.

Despite the skepticism that prevails among journalists and economists, the IMF is very happy about the progress Sri Lanka is making on the commitments it made as a part of the IMF’s four-year EFF to the country.

An IMF delegation, which was in Colombo recently to assess the progress of the agreement, is optimistic. IMF Director of Asia and Pacific Department Krishna Srinivasan told a press conference in Colombo on May 15 that the Sri Lankan government has shown “commitment to the reform effort” that is a part of the agreement with the IMF.  He added that the “authorities are making good faith efforts to negotiate with all the creditors, both private creditors and official creditors.”

Ranil Wickremesinghe took over as President of Sri Lanka in July 2022 when the country was in the middle of its worst economic and political crisis since independence in 1948. On March 20, 2023, the IMF approved a $3 billion Extended Fund Facility (EFF) to support Sri Lanka amid its economic crisis.

Peter Breuer, IMF’s Senior Mission Chief for Sri Lanka, Asia, and Pacific Department said they “see things developing more or less in line with expectations.”

Srinivasan added that Sri Lanka had to complete a number of prior actions before the IMF approved its bailout package. These actions were extensive and required a significant commitment from the Sri Lankan government.

Among these are cost-reflective of a number of goods and services that the government had subsidized for decades.  Sarwat Jahan, the IMF Resident Representative in Sri Lanka said the Ceylon Petroleum Corporation (CPC) and Ceylon Electricity Board (CEB) would have to recover their costs until the end of the IMF program.

The government met all these requirements, which shows that they are serious about implementing the reforms necessary to address the country’s economic crisis, Srinivasan said.

The conditions attached to IMF loans often involve actions aimed at discontinuing industry subsidies, avoiding exchange rate manipulation, adjusting budget priorities, and regulating wage levels. Leaders, who face diverse political limitations, differ in their willingness to engage in an agreement with the IMF and make compromises in these four areas.

Considering that IMF loan conditionality agreements usually involve implementing fiscal austerity measures, leaders with larger winning coalitions will encounter more challenges when attempting to negotiate an agreement for IMF financing.

On the other hand, when a regime maintains power through a narrower network of closely-connected supporters, he or she finds it easier to enter into an agreement with the IMF.

Miles Kahler, a senior fellow for global governance at the Council on Foreign Relations in Washington, DC, in his 1993 book chapter titled “Bargaining with the IMF: Two-Level Strategies and Developing Countries,” outlines two key aspects of domestic politics that influence the process of loan negotiations: firstly, the degree to which a technocratic elite is insulated from economic interests, and secondly, the frequency with which elites face political challenges like elections.

Another factor that can impede the formation of a loan agreement is the presence of multiple veto actors, such as a separation of powers or the existence of multiparty governing coalitions.

Kahler says that when a country has a higher number of veto actors capable of obstructing a loan agreement, the scope of domestic political consensus becomes narrower, resulting in increased negotiation costs for the IMF. Typically, the count of veto actors is determined by assessing the number of parties in a government coalition in countries where genuine political competition exists.

This explains why it was extremely difficult for former President Gotabaya Rajapaksa, who came into power through a coalition of populism and with the support of a number of interest groups, from big businesses to professional associations, to enter into negotiations with the IMF.

On the other hand, Wickremesinghe is the head of the United National Party, a political party that obtained around 250,000 votes from 15 million eligible voters. He has one MP in Parliament, Wajira Abeywardana, who is a staunch loyalist. Wickremesinghe is backed in parliament by the Sri Lanka Podujana Peramuna (SLPP), whose MPs depend on him for political survival and would vote for any legislation that he brings forth.

Sri Lankan legislators are entitled to several perks at the end of the full tenure of five years and most of the SLPP MPs that back Wickremesinghe are adamant on completing their terms. Wickremesinghe has also indicated that there will be no elections until the economy is stabilized and it is likely that the first election Sri Lankans will see is a presidential election, probably in 2024.

Therefore, Wickremesinghe can implement the IMF recommendations completely, as he is not answerable to any political coalition or interest groups. Neither does he face an election. Wickremesinghe’s personal ideology also aligns with that of the IMF. It is unlikely that these factors were ignored by the IMF when the loan was approved and when they evaluate whether Sri Lanka will adhere to IMF conditionalities.

Source

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The current situation in Eurasia is complex and changeable, with rising security risks, a dangerous economic environment, and many uncertain factors, which have put the “One Belt, One Road” initiative facing new tests and pressures. However, there are “opportunities amid crises”. China and regional countries are constantly exploring new space for cooperation, new logistics channels are being rapidly built, and new settlement methods are improving day by day. The spirit of win-win cooperation and a shared future embodied in the “Belt and Road” initiative has been accepted by countries in the region. In line with the actual needs and interest demands of various countries, this creates new opportunities for all parties to promote the construction of the “Belt and Road” with high quality.

This year marks the tenth anniversary of the Belt and Road Initiative. Over the past ten years, with the joint promotion of China and Eurasian countries, the “One Belt, One Road” initiative has taken root and blossomed in Eurasia, achieved fruitful results, and has become a popular international public product and international cooperation platform.

In recent years, against the backdrop of the century-old changes in the world that have accelerated and the international situation has entered a period of turbulence and transformation, the situation and pattern in Eurasia have experienced unprecedented complexity and change since the collapse of the Soviet Union. Relations between major powers have become unprecedentedly tense and regional security risks have risen. The economic development environment has reached a new high and the economic development environment has become more dangerous, causing China and Eurasian countries to jointly build the “Belt and Road” and face new tests and pressures.

First, the negative impact of geopolitical factors is highlighted. In the context of intensified confrontation between major powers in Eurasia, the United States, on the one hand, is stepping up efforts to contain and weaken Russia, and on the other hand, it has never forgotten to suppress China. The United States has always forcibly attached a geopolitical label to the “One Belt, One Road” initiative. After the Ukraine crisis broke out, the United States became more vigorous in calling the “One Belt, One Road” initiative a “geopolitical tool” and stepped up its pursuit of related cooperation. The joint construction of the “Belt and Road” by Asian countries poses tremendous pressure.

Secondly, connectivity construction faces huge challenges. The Russian railway network is a necessary place and a key component of the Eurasian Continental Bridge and the New Eurasian Continental Bridge. Ukraine and Belarus are located at strategic transportation hubs and are important hubs for the extension of the Silk Road Economic Belt to Europe. The above three countries It carries the main transportation route from China to Europe. Affected by factors such as war and sanctions, the “Ukrainian line” of China-Europe freight trains has been suspended. The route to Europe via Ukraine has been rerouted. The lines transiting Russia and Belarus are also facing potential risks. Some of the development achievements of China-Europe freight trains in recent years have been met with uncertainty. Impact, high-quality promotion of the “Belt and Road” transportation connectivity construction is facing new challenges. In addition to railway transportation, road transportation, sea transportation, and air transportation are also blocked to varying degrees, and the logistics chain between Asia and Europe needs to be reorganized.

Thirdly, foreign investment and trade are encountering more uncertainties. In the early stages of the Ukraine crisis, factors such as the closure of some ports, rising oil prices, depreciation of the ruble, and financial sanctions pushed up freight rates between Europe and Russia and exchange rate risks in cross-border settlements. Risk aversion among foreign trade entities increased, and transaction willingness declined. China and Eurasia The country’s trade volume once fell. As the crisis becomes protracted, international trade faces the risk of host country-based policies and protectionism. People’s livelihood and employment problems in some countries are becoming increasingly serious, exacerbating protectionism in the Eurasian region, stimulating and breeding extreme nationalism in the region, thus jeopardizing the implementation of the “One Belt, One Road” project.

Despite geopolitical turmoil and the impact of the epidemic, China’s economy has always maintained vitality and has become a strong driving force leading global and regional economic recovery. The joint construction of the “Belt and Road” between China and Eurasia can be described as “an opportunity amidst crisis.”

In 2022, the import and export volume between China and the “Belt and Road” partner countries will reach 13.83 trillion yuan, a year-on-year increase of 19.4%, accounting for 32.9% of China’s total foreign trade value. The joint construction of the “Belt and Road” between China and Eurasia has also ushered in many new opportunities and favorable conditions. New cooperation spaces are constantly being discovered, new logistics channels are being rapidly built, and new settlement methods are improving day by day.

First, China has maintained high-frequency interactions with leaders of Eurasian countries. In September 2022, President Xi Jinping went to Samarkand to attend the SCO Summit and pay state visits to Kazakhstan and Uzbekistan. In May 2023, the heads of state of China and the five Central Asian countries gathered in Xi’an to hold the first China-Central Asia Summit. China will also hold the third “Belt and Road” summit forum this year.

Second, the economic ties between China and the Eurasian region have been continuously strengthened, and the space for cooperation has become broader. In 2022, the trade volume between China and Eurasian countries will grow steadily, with China’s imports and exports to the five Central Asian countries, Russia, and Belarus increasing by 45.4%, 29.3%, and 33% respectively year-on-year. Many new growth points and highlights have emerged in the economic cooperation between China and Eurasian countries, especially in the fields of food trade, e-commerce, automobile manufacturing, clean energy, information technology, biotechnology and other high-tech industries. Mutually beneficial cooperation is developing rapidly.

Third, thanks to flexible adjustments, the operation of China-Europe trains has shown strong resilience. After the conflict broke out, Chinese cities opened new northern routes into Europe that bypassed Ukraine. There will be 16,000 trains operating in 2022, a year-on-year increase of 9%.

Fourth, the trend of local currency settlement promotes the process of RMB internationalization. European and American countries have unprecedentedly dropped a “financial nuclear bomb” on Russia and removed some of its banks from the SWIFT system, which has brought difficulties and obstacles to cross-border settlement with Russia. Expanding cross-border settlement channels, avoiding the risk of financial sanctions, expanding the scale of local currency settlement, and establishing and improving a non-US dollar diversified payment system have become a strong consensus and practical demand between China and Eurasian countries. Against this background, RMB internationalization is facing new opportunities. The local currency settlement between China and Russia has achieved leaps and bounds, covering about 50% of the trade volume in 2022. In the future, China and Russia will also try to switch to local currency settlement in natural gas exports to China. In addition, the RMB has become a safe-haven currency recognized by Eurasian countries.

High-quality joint construction of the “Belt and Road” is a major strategic deployment to implement high-quality development of China’s economy. The Eurasian region is not only China’s peripheral region and strategic depth, but also a key area for China to connect the world westward and improve the level of openness in China’s central, western and northeastern regions. .

The “Belt and Road” initiative transcends the Cold War mentality and adheres to the principle of extensive consultation, joint contribution and shared benefits. It contains the spirit of win-win cooperation and a shared future, and has been accepted by regional countries that cherish their own sovereignty and independence. The cooperation direction of the “One Belt, One Road” initiative is highly consistent with the actual needs and interests of all countries. Its core focus is development issues, and seeking development in the changing situation is the top priority of Eurasian countries and the greatest expectation of the people. Under the new situation, stronger political mutual trust and stronger consensus on cooperation will create new opportunities for high-quality and sustainable promotion of the “Belt and Road” construction.

Source: SHM News

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