Sri Lanka 2020 deal talks hit a snag on debt sustainability: IMF spokesman
ECONOMYNEXT- Talks on an International Monetary Fund program in 2020 had hit a snag over policies required for debt sustainability and fix balance of payment trouble, an official had said as the island follows alternative strategies to repay debt.
Sri Lanka and the IMF initiated talks on Rapid Finance Instrument in 2020 when the Coronavirus epidemic struck, but no deal was reached.
“So we have sought, but not reached understanding, on how to fulfill the key requirements for what could be a rapid financing instrument which would include policies to continue ensuring debt sustainability to address the balance of payment challenges including from the COVID‑19 impact on tourism and to preserve international reserves,” IMF spokesman Gerry Rice told reporters in Washington.
Sri Lanka has a Latin America style central bank set up by a Federal Reserve ‘money doctor’ in the style of one developed in Argentina by Raul Prebisch.
Fed’s Latin America unit chief Robert Triffin set up similar central banks in a number countries with unrestrained money printing powers during and after the Great Depression, that led to massive currency collapses as soon as private credit picked up or the Fed tightened policy.
They were either set up anew or original gold-standard central banks with stronger restraints were diluted with ‘counter-cyclical’ interventionist capacity.
Prebisch and Triffin later independently advised other central banks in Latin America, which got into similar troubles.
Prebisch led a mission to Honduras in 1943 to set up a soft-peg which had gone to the IMF 25 times and Venezuela in 1948 (Heterodox Central Banking in the Periphery). He also invited Prebisch to join him in some.
Forex shortages from liquidity injections then led to import controls, the denial of free trade to the poor and import substitution oppression of the entire populace by rent seeking producers, critics say.
Many of the countries ended up in import substitution and default in forex debt.
IMF is monitoring Sri Lanka, Rice said.
“Indeed, Sri Lanka has relied on important restrictions since last year and recently introduced additional measures such as a requirement to convert 25 percent of export proceeds,” he said.
“We continue to closely monitor these economic policy financial developments in Sri Lanka including the recent agreement on a swap line with the People’s Bank of China.”
IMF programs themselves fail on inconsistent policy involving a so-called highly unstable panic triggering ‘flexible exchange rate’ with little or no credibility which is neither a consistent peg nor a consistent floating regime.
In 2018 Sri Lanka’s currency was busted purely by open market operations amid some Fed tightening and a domestic credit recovery leading to a consumption and growth collapse, when an unprecedented fiscal correction was made.
The IMF program had a high inflation target of up to 8 percent, while giving a forex reserve target which requires pegging, leading to contradictory money and exchange policies (soft-pegging).
Sri Lanka current balance of payments troubles stemmed from open market operations aimed at yield curve targeting that began around August 2019.
The IMF itself gave the central bank technical assistance to calculate an ‘output gap’ leading to it being targeted despite the central bank having no mandate to target growth and create monetary and economic stability but only to maintain economic and price stability.
When open market operations reversed in August 2019, Sri Lanka had about 8.8 billion dollars of forex reserves and access to capital markets.
Policy then worsened with a tax cut in December and rate cuts from January and unprecedented liquidity injections from around March 2020. (Colombo/Mar13/2019)