No severe BOP crisis in Sri Lanka; statement on IMF talks in March: PM

ECONOMYNEXT – Sri Lanka’s Prime Minister Ranil Wickremesinghe denied that there was a severe balance of payments crisis in the country and said he will make a statement to parliament in early March on discussions with the International Monetary Fund.

"We have discussed with the IMF and are continuing discussion," Prime Minister told parliament, responding to a question from opposition legislator, Bandula Gunewardene.

"We have also discussed with other experts. In the short term we will have to borrow. At the moment global interest rates are also moving up."

"In the first week of March we hope to make a full statement. Over the next two to three weeks we will watch what happens in the international economy."

Gunewardene told parliament forex reserves were down to 6.3 billion in January and 1.1 billion of that was borrowed from the Reserve Bank of India and said there was a balance of payments crisis.

Prime Minister Ranil Wickremesinghe said there was no severe crisis.

"There is no great crisis <i>(vissharler arboodhayak ne)</i>. We are still living accordingly," he said.

"We may have to take more loans in the short term. But by 2018 or 2019, we will lay a foundation and by 2020 we will be in a position to pay it back."

It is not clear what kind of program Sri Lanka is negotiating.

In 2009 and 2011, where BOP crises was created by loan funded energy subsidies which were ultimately accommodate by central bank credit and could be fixed by raising fuel prices and a classic IMF bailout or ‘Stand By Agreement’.





But critics say the budget was structurally damaged by salary, pension and subsidy hikes in 2015 which are permanent in nature. Money printed to finance the budget in 2015 had made the rupee collapse from 131 to 144 to the US dollar over the past year.

It is not clear whether the problems could be fixed by a stand-by loan, or a longer term program like an Extended Fund Facility is needed.

Prime Minister Wickremesinghe said Sri Lanka’s non-oil imports had gone and the benefit of an oil price fall was not felt. Analysts had warned at the end of 2014 that when prices of oil is cut, disposable income go up and people will spend more on non-oil imports.

Conversely if oil is market priced, when oil prices go up, it doesn’t cause any balance of payments problems either as money available to spend on non-oil imports will fall.

Prime Minister Wickremesinghe said higher levels of imports indicated that there was more money in the hands of people after his administration came to power.

Analysts say Sri Lanka’s balance of payments pressure is partly caused by a salary hike to state workers and other state spending which was financed by central bank credit (central bank accommodation of the deficit).

Sri Lanka’s has had balance of payments problems ever since the central bank with money printing powers was created in 1951 to join the Bretton Woods system of failed soft pegs. At that time Sri Lanka’s national debt was only 16 percent of gross domestic product.

The architects of the IMF including arch interventionists like Harry Dexter White knew that soft-pegs were inherently unstable and created the agency to fund countries that got into trouble by printing money and blowing credit bubbles. (Colombo/Feb10/2016)

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