The US government, which wields considerable influence at the International Monetary Fund (IMF), has sought to delay Sri Lanka's USD 1.9 billion loan appeal. Washington's hesitance is tied to the context of the humanitarian crisis that preceded the defeat and destruction of the LTTE and the killing of its leader, Velupillai Prabhakaran. Sri Lanka needs the IMF loan to service its external debt, which has accumulated as a result of soaring defence expenditure as well as borrowing related to controversial oil-hedging deals. The government is also seeking funds for the reconstruction of the conflict-affected northeast.
The disbursement of the funds has also been a somewhat controversial issue outside Washington, DC. Initially, the United Nations Security Council had determined that it would not block the loan, when the subject came up during informal discussion. The UN Office of the High Commissioner for Human Rights (OHCHR), Britain and France have, however, asked for an investigation into war crimes and violations of the Law of War by both sides. Earlier, the Security Council president, Mexican Ambassador Claude Heller, stated that "all 15 members agreed that such a move or other steps to punish Sri Lanka were unnecessary." The island's two main donors, China and Japan, along with Russia and Vietnam on the Security Council, regard the conflict between the government and LTTE as an internal matter.
Beyond the politics, the pending IMF loan to Sri Lanka re-opens an old debate on international aid, its relevance and effectiveness, both within and beyond the island. Before the current global crisis, the IMF and many supra-national banks had almost run out of relevance – and, more significantly, clients – in the developing world. Many countries had started borrowing in private capital markets. This was partly due to the unpopularity of the Structural Adjustment Programmes and other conditionalities imposed by the body. The institution had also lost considerable credibility for its response to the East Asian financial crisis during the late 1990s, and its handling of the Argentina economic collapse, from 1999 until 2002. This was particularly true in the wake of World Bank Chief Economist Joseph Stiglitz's critique that IMF policies actually exacerbated these crises. Stiglitz subsequently lost his job at the World Bank, but won the Nobel Prize for Economics in 2001.
The IMF's diminished relevance prior to the current financial crisis was also due to the emergence of new Asian donors such as China and India moving into Africa and Asia with billions of dollars, to secure the natural resources needed to sustain growth at home. Following the financial crisis, the IMF gained a new lease of life, with a revitalised mandate to assist poor countries affected by the downturn. The G20 Summit in London in April was a particular turning point, as the IMF garnered pledges in the billions to help economic recovery. However, at the same meeting, British Prime Minister Gordon Brown also declared, "the Washington Consensus is dead." (Perhaps he was following in the English tradition of announcing, "The king is dead! Long live the king!") In any event, it appears that the IMF, at least in Sri Lanka, may now step in where the World Bank once trod – the latter being the Bretton Woods twin once tasked with post-conflict reconstruction. Going off of the Sri Lanka's most recent aid experiences, however, perhaps it will make little difference: despite promises in 2003 of some USD 4.5 billion by the four co-chairs of the peace process (Norway, Japan, the US and the EU), much of that aid turned out to be 'phantom aid', with some 70 percent being given in the form of loans rather than grants.