ADB looks at US$200mn in budget support for IMF Sri Lanka program

ECONOMYNEXT – The Asian Development Bank is in talks to provide up to 200 million US dollars in budget support for Sri Lanka through a policy loan, which will come with a planned International Monetary Fund loan to the Central Bank, officials said.

"It depends on discussions with the authorities," ADB President Takehiko Nakao said.

The budget support loan will come as a ‘capital market development’ loan with requirements for reforms that will expand markets and bring more tax revenues in the future.

ADB is already has given about 1.5 billion US dollars to Sri Lanka in project financing over the past few years and has ramped up lending to 700 million this year and is expecting to lend over 2.0 billion over the three years from 2016.

International lending agencies like the ADB and World Bank usually give project loans which can only be spent on a specific useful project for the people such as a hospital, road or education.

But budget support can be spent on wasteful spending priorities of the rulers such as subsidies or state worker salaries or the cost of keeping a large cabinet, provided reforms are undertaken to fix the budget in the long term.

Nakao said Sri Lanka had to take more taxes and reduce the budget deficit.

Sri Lanka’s budget was derailed in January 2015 with a revised budget that raised state worker salaries by 40 percent and also hiked pensions and subsidies.

The Central Bank then printed money pushing up credit and demand generating balance of payments pressure and forced the rupee to collapse from 131 to 145 to the US dollar.

Currency depreciation is the most potent tool rulers have destroy real financial savings and salaries of the poor and push those who have moved out of poverty back below the poverty line by altering the price structure of a country.

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Nakao said ADB could provide about 200 million dollars as budget support loan.

Sri Lanka had already asked for International Monetary Fund support.

He expressed hope that discussions with the International Monetary Fund will generated results.

The IMF typically lends directly to the Central Bank, which loses foreign reserves when money printed by it is ‘redeemed’ in currency defence in forex markets.

But agencies like the ADB and World Bank give budget support.

ADB country chief Sri Widowati told EconomyNext in an earlier interview that the policy loan will depend on the outcome of talks with the IMF.

The World Bank is also expected to chip in with a policy loan of about 500 million US dollars.
Budget support allows the Central Bank to keep interest rates lower than it would otherwise be and allow private sector credit to expand.
 

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