With prospects of Sri Lanka striking oil seemingly looking good, an IMF official briefing reporters in Washington DC on Monday stressed the importance of emerging economies having an adequate, regulated financial framework to safeguard against the squandering of its natural resources (NR) from corruption and wastage.
Rabah Arezki of the IMF Institute speaking on the topic “Current Issues-Natural Resources Management,” gave the example of Chile as positive example of putting in place a mechanism to safe guard revenue from its copper mines a key foreign exchange earner.
“For instance there is a cap on how much of those monies could be used for public investments,” he said. There are committees appointed comprising academics and experts in the copper sector, empowered to make such decisions, said Arezki.
Though such committees have no power to direct politicians to decide on which infrastructure development project to invest, they are empowered to ascertain the commercial viability of such projects and if necessary to strike down projects that they believe are not viable.
He said that at the height of the commodity boom at the turn of the century, because of the restrictions enforced by both the then Chilean President Ms. Michelle Bachelet Jeria and her Finance Minister on public investments, they became unpopular.
But the wisdom of their actions were seen when the commodity bubble burst, made worse by a deadly earthquake that hit the capital city Santiago. The Chilean economy however didn’t go down despite these vicissitudes due to the earlier prudent and austere spending programmes instituted by the government.
As a result the Chilean President and the Finance Minister who were previously unpopular, saw their popularity ratings soar.
Arezki said that grandiose infrastructure schemes not giving adequate financial returns may also be wreaked with corruption.
Drawing examples from history, he said that the 1970s commodity boom that benefited emerging economies, saw them ploughing back their earnings on public investments and transfers which also increased their public debt to unsustainable levels when the commodity bubble burst, forcing them to seek IMF bailouts.
Arezki, said that in the present context, the danger is that with commodity prices being once more on the ascent, whether that would lead to another debt trap, like in the 1970s.
In this context some of Sri Lanka’s questionable infrastructure projects, especially those financed from foreign commercial loans,, may have to be looked at in terms of their viability, coupled with the burden that the accumulation of such debt would have on the exchequer. Among those projects are the Hambantota seaport and the Mattala airport, massive road development projects all located in President Mahinda Rajapaksa’s electoral stronghold, the Hambantota district. Losses caused by corruption may not necessarily be measured only in US dollar terms, in the broader canvass, it’s the loss that has to be borne by future generations and made worse would lead to the rise in social instability as a result, Arezki warned.
Human Capital, Best Resource
Developed economies which are scarce in natural resources (NR) have got to the top by investing in human capital, Arezki pointed out.
Quoting the father of modern Singapore Lee Kuan Yew, he said that despite the fact that Singapore was bereft of any NR, it however became an economic powerhouse by investing on its people.
In the context that certain emerging economies, which, especially in the 1970s, benefited due to the rise in oil prices, only found themselves mired in increased indebtedness when prices fell, having had invested the monies made in good times on public works which were not necessarily economically viable.
They had to be eventually bailed out by the IMF.
Pointing out that natural resources are finite, the long term answer is economic diversification which will lead to fiscal sustainability and reduce macroeconomic volatility. Arezki further said that resource rich countries are generally dependent on revenue from this avenue, ignoring the non resource sector. “But tax the non resource sector to help fiscal stability, he said.