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Monday June 27th, 2022

Sri Lanka chamber calls for urgent end to power, forex crisis, calls for IMF program

ECONOMYNEXT – Sri Lanka’s Ceylon Chamber of Commerce called for an urgent end to the foreign exchange crisis which was leading to hurting industry and tourism.

“The Chamber is of the view that these issues are all ramifications of the shortage of foreign exchange experienced by the country and believes urgently addressing the currency issue is the fastest way in which the power and energy issues can be tackled in the short term,” the Ceylon Chamber said.

“As a first step in this direction, the Ceylon Chamber of Commerce urges the Government of Sri Lanka to commence a process of engagement with the International Monetary Fund (IMF) without any further delay to obtain their technical advice in managing the debt servicing as well as boosting foreign reserves.”

The IMF completely halts the us of foreign reserves (savings) for imports through a float of the currency and stops a country from living beyond its means using accumulated reserves of the past.

Instead interest rates are raised to slow domestic credit and reserves are collected as private credit and consumption slows. Breaks are also put on state spending.

An IMF program usually only allows reserves to be used in extreme cases (under a disorderly market conditions or DMC rule) for trade transactions, sometimes under a non-sterilized rule which makes rates go up.

Instead IMF forces a central bank, after a float to buy dollars and raise Net International Reserves through an NIR target by re-pegging at a different rate. Reserves however are allowed to be used for debt repayment through a continuous performance criterion on non-accumulation of external arrears.

An IMF program will may involve debt – restructuring, when a country is cut off from capital markets.

The full statement is reproduced below:

Ceylon Chamber seeks urgent action to restore electricity and fuel supply to avoid a standstill in economic activity

The Ceylon Chamber of Commerce notes with serious concern the adverse effects brought on its members and all sectors of the economy in general as a result of the ongoing interruptions to the supply of electricity coupledwith frequent disruptions to the availability of fuel.

The Chamber is of the view that these issues are all ramifications of the shortage of foreign exchange experienced by the country and believes urgently addressing the currency issue is the fastest way in which the power and energy issues can be tackled in the short term. CCC will also soon provide further recommendations on what other actions are needed specifically on power and energy sectors in the medium to long term in consultation with relevant experts.

As a first step in this direction, the Ceylon Chamber of Commerce urges the Government of Sri Lanka to commence a process of engagement with the International Monetary Fund (IMF) without any further delay to obtain their technical advice in managing the debt servicing as well as boosting foreign reserves.

The Chamber hopes that this engagement should result in a Debt Sustainability Analysis being carried out by the IMF which could pave the way for a pre-emptive debt restructuring programme.

It is the Chamber’s belief that a systematic and methodical approach to restructure debt with the support of the IMF will help the Government to successfully manage its external debt obligations while ensuring the availability of much needed foreign exchange to support vital economic activity.

This could ensure the allocation of scarce foreign exchange reserves towards the purchase of essential supplies such as fuel for electricity generation, transport of goods and persons and other industrial purposes without holding it back for debt servicing.

The Chamber is concerned that the recovery seen recently in tourism and export sectors can be seriously hampered and economic growthslowed down unless urgent action is taken to eliminate the disruptions to the supply of electricity and fuel which is threatening to cripple all sectors of the economy.

The Ceylon Chamber of Commerce, on its own and together with other chambers, has,on numerous occasions, consistently advocated an engagement with IMF since the beginning of the Covid-19 pandemic in March 2020.

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