Sri Lanka IMF deal set to resume in May; budget gets thumbs up

ECONOMYNEXT – Sri Lanka’s extended program with the International Monetary Fund is expected to go for board approval in May, an official said as the country was rocked by radical Islamist bombings that killed over 350 people.

"Based on the important progress to date and the reform plans under the program, our Executive Board is expected to consider in mid-May the authorities’ request to complete the fifth review under the arrangement and extend it by one additional year until June 2020," IMF chief Manuela Goretti said in an emailed statement.

"This will provide additional time to the authorities to anchor macroeconomic stability and complete their economic reform agenda."

The IMF was waiting for a budget for 2019 to be passed to complete its review and provide another tranche of money to boost Central Bank’s gross reserves.

"The 2019 budget approved in early April strikes a good balance between advancing revenue-based fiscal consolidation, which is important to shore up market confidence given Sri Lanka’s high debt and refinancing needs, while making space for macro critical capital and social spending and business friendly tax measures," Goretti said.

Goretti said Sri Lanka has emerged from the initial shock of the attack but must take steps to protect tourism which is a key growth driver.

"Initial financial market pressures seem to have been contained in the aftermath of the attacks," she said.

"Decisive policy and security measures by the authorities will be important, in particular for tourism, which accounts for 5 percent of GDP, to build on the strong performance of recent years."

"Under a lending arrangement with the Fund since mid-2016, Sri Lanka has made important progress in reforming its economy, including by revamping its tax system, strengthening social safety nets, and transitioning to inflation targeting."

Approval of a review was suspended after the central bank started printing money again from around March 2018losing the ability to both collect forex reserves and repay foreign debt and killing a fledgling recovery that began in the first quarter with the monetary instability that followed.





Sri Lanka has a highly unstable soft-peg where authorities intervene on a bewildering array of explicit and implicit convertibility undertakings (pegging) and then print large volumes of money within a short period to offset the interventions.

In 2018, monetary authorities generated two liquidity shocks one with domestic asset acquisition (April) and the second (around August) with mostly foreign asset acquisitions apparently to close a gap between actual growth and potential growth, generating monetary instability analysts have said.

De facto inflation targeting while convertibility undertakings are in place (targeting both interest rates and exchange rates at the same time) has been the key trigger of the economic instability since 1950 analysts who have called for central bank reforms have said.

Private credit has since plunged in the first quarter partly due to corrective actions to end monetary instability after credibility of the peg was lost, but also due to political a crisis generated by a so-called constitutional coup by President Maithripala Sirisena.

"We are deeply saddened by the horrific attacks in Sri Lanka and have offered our deepest condolences to the authorities and those that have lost loved ones," he said.

"The IMF joins the international community in condemning these atrocious acts of terrorism." (Colombo/Apr25/2019-SB).

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