ECONOMYNEXT - Sri Lanka needs structural reforms to boost growth and has to keep monetary policy tight for stability and state enterprises have to fixed particularly energy utilities, the International Monetary Fund has said.
IMF mission chief Jaewoo Lee said Sri Lanka's performance under its program has been broadly on track with foreign reserve collections ahead of target but reform on state enterprises delayed and progress being made on revenue collections and he budget deficit.
"Nevertheless, Sri Lanka remains vulnerable to shocks given its high level of public debt, large financing needs, and weak external position," he told reporters Friday after the lender released the mission staff report prepared for a December review of the program.
"Therefore, it is important to build on the progress made and accelerate reforms to reduce fiscal and external vulnerabilities.
"Fiscal consolidation should continue, supported by effective tax administration and spending controls."
Lee said it supported the central banks stance of not cutting policy rates at this time with inflation at a high 7 percent.
"On monetary policy, the central bank should maintain a tightening bias to contain inflation and credit growth pressures, while continuing to accumulate reserves accompanied by greater exchange rate flexibility," Lee said.
Sri Lanka's central bank prints money to finance the budget deficit and also delays interest rate hikes when domestic credit growth picks up, generating balance of payments crises, currency collapses and high inflation.
There has been growing understanding of the damage done by the central leading to intensive calls for its reform from about 2005, either for it to be abolished in favour of a currency board or to bring and inflation targeting to restrain is discretion generate inflation and economic instability.
The latest BOP crisis was generated by the failure to tighten policy in January 2015 when a revised budget went off the rails. In April with private credit also rising the central bank cut rates after releasing tens of billions of rupees of liquidity tied up in term repos.
Critics are divided whether the rate cut was done to allow Perpetual Treauries, a primary dealer connected to the son-in-law of then central bank Governor Arjuna Mahendran, which had bought bonds at high rates at a rigged auction in February to exit at a profit or due to incompetence or fiscal dominance.
The central bank is now moving towards what it calls a 'flexible inflation targeting' framework, which critics believe will give it more leeway and discretion to create instability than a simple inflation targeting law with a floating rate.
The central bank is also targeting a real effective exchange rate index, steadily depreciating the currency in an inflationist-Mercantilist in a bid to boost exports by denying a living wage to export workers and making households in lower income brackets more vulnerable.
Because Sri Lanka does not market price energy, export firms get an additional benefit from currency depreciation going beyond a lower real wages to workers. The losses that accumulate in state energy and water utilities also gives extra profits to exporters.
However under the IMF deal Sri Lanka is expected to market price fuel from January and petroleum from September. With the US credit system getting back to normal, global commodity prices have also started to move up. (Colombo/Jan12/2018)