May 15, 2009 / 3:27 PM / 8 years ago

ANALYSIS-Sri Lanka IMF war row shows geopolitics matters

6 Min Read

By Peter Apps, Political Risk Correspondent

LONDON, May 15 (Reuters) - Sri Lanka's apparent difficulty securing a $1.9 billion IMF loan -- with its conduct in its civil war becoming a key sticking point -- is a rare glimpse into how geopolitical importance can influence multilateral aid.

While fellow troubled emerging economies Ukraine and Pakistan have also had their disputes with the International Monetary Fund, many investors feel they are simply too geopolitically crucial to be allowed to default.

Nuclear-armed Pakistan, which is battling Taliban militants and a linchpin of U.S. strategy in neighbouring Afghanistan, was granted a $7.6 billion IMF loan in November, averting a balance of payments crisis.

Ukraine's $16.4-billion deal has at times been delayed due to disputes over budget deficit and reforms, but most analysts expect Kiev to be kept afloat by the West through the IMF given its position bordering Russia and straddling key energy routes.

While Sri Lanka is not devoid of geopolitical importance, overlooking key sea lanes around the foot of the Indian subcontinent, analysts are unconvinced that is enough.

"If you look at the situation with Pakistan and Ukraine, geopolitics certainly played a role in getting an IMF loan," said Lars Christensen, head of emerging market research at Danske Bank.

"You can see Sri Lanka is an entirely different case -- it is much less important. What is also different is that unusually this is being done more in public."

Sri Lanka's military has forced Tamil Tiger rebels back to a narrow strip of coastal land, trapping some 50,000 civilians.

The United States and the United Nations have accused the government of indiscriminate shelling and the Tigers of shooting those who try to leave; effectively making them human shields.



PRESSURE, PROTESTS

Rights groups have accused both sides of a string of abuses.

Listed as terrorists by the European Union, India and north America, the Tigers have suffered a global crackdown on their funding. But the government, which issued a Eurobond in 2007, has effectively been shut out of international capital markets by the credit crunch.

Groups such as Human Rights Watch have called for humanitarian conditions to be attached to any IMF loan. Ethnic Tamil protesters have taken to the streets in many Western capitals, demanding their governments act against Sri Lanka.

U.S. and British officials have called for the loan to be withheld or delayed as Sri Lanka's government repeatedly ignores international calls for a humanitarian ceasefire.

The central bank says there is no delay and the process is moving smoothly, but when it announced it was seeking a loan, it said the first disbursement could come by the end of April.

IMF chief Dominique Strauss Khan said on Friday he expected resolution within a few weeks.

The U.N. Security Council, which includes China and Russia, vehemently opposed to outside interference in internal conflict, has said using the loan to punish Sri Lanka was unnecessary.

But with the United States the fund's major shareholder, if Washington chooses to block the loan, it almost certainly can.



SHORTAGE OF GOODWILL

"We have ... raised questions about the IMF loan at this time," U.S. Secretary of State Hillary Clinton told reporters on Thursday. "We think it is not an appropriate time to consider that until there is a resolution of this conflict."

Sri Lankan officials have reportedly rowed with Western ministers and government Web sites have railed against foreign interference in the conflict, saying any ceasefire would risk war restarting again further down the line.

That has left Sri Lanka and its $40 billion economy, already suffering shrinking export earnings and foreign currency reserves, much shorter on Western goodwill than after the 2004 tsunami, when it received large amounts of aid.

A major sovereign default would normally unnerve global markets that are cautiously recovering after last year's crash, but analysts say the impact of any Sri Lanka default would depend largely on what was seen to have blocked the loan.

"If it is seen as being blocked because of the war, I wouldn't think there would be any wider market impact," said Danske Bank's Christensen. "But if it was seen as being because the government would not make concessions in terms of its own economic policy, that would be different."

Sri Lanka has repeatedly said it would not agree a loan if it came with conditions such as slashing rural development projects seen key to the popularity of President Mahinda Rajapaksa. It would want to avoid defence spending cuts.

If that appeared to be the reason for any delay or blocking of the loan, it would shift market expectations that the lender might take a tougher line with other economies, potentially imperilling other deals.

"Even in Ukraine, there will be a limit to the IMF's patience," said Christensen.



RELATED STORIES > Sri Lanka fighting rages, more civilians flee [ID:nCOL458480] > Pressure grows for Sri Lanka human rights inquiry [ID:nLF962694] > SCENARIOS-The end of Sri Lanka's war [ID:nCOL474078] > Q&A-Sri Lanka's propaganda war [ID:nCOL480174]
(Editing by Jon Hemming)



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