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Sri Lanka to negotiate IMF deal from March: spokesman

Feb 12, 2016 08:26 AM GMT+0530 | 0 Comment(s)

ECONOMYNEXT - The International Monetary Fund will arrive in Sri Lanka in late March to start negotiating a deal  an official said, as the country's balance of payments is reeling from budget deficit which has been accommodated with loose monetary policy.

IMF spokesman Gerry Rice said a technical mission that ended their visit in February 05 had already identified the need to reduce the budget deficit and raise taxes.

"[T]hey will be worked out in a future negotiating mission that could take place in late March or early April..," Rice said.

"We are considering the options and that will depend on our assessment of macroeconomic vulnerabilities, the nature and size of balance of payments needs, and government policies to address those vulnerabilities."

Sri Lanka has a bloated public sector and the new administration raised state salaries by 40 percent, which private citizens cannot afford at the existing level of taxes.

The IMF has asked tax exemptions to be ended. Over 2015 monthly tax revenues had increased from around 90 billion rupees to about 140 billion indicating some level of correction, though it also includes one-off taxes.

In 2016 there are no new salary increases.

Balance of payments crises happens to countries with so-called soft pegs when the central bank accommodates budget deficits by printing money to keep interest rates down.

Sri Lanka has been hit by balance of payments pressure shortly after a soft-pegged central bank was created, and exchange controls were slapped from 1953.

The low rates spur consumption and private credit making it difficult for the government to sell Treasuries.

Treasury auctions then fail and the central bank buys the securities with printed money at a low rate injecting domestic currency reserves in the banking system which when spent and loaned will put pressure on the currency, unless mopped up by selling dollar reserves (currency defence).

 


 

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