Sri Lanka IMF program on hold in final lap

ECONOMYNEXT – A deal with the International Monetary Fund is in limbo until the any new administration confirms that it wants to go ahead with a deal hammered out recently or make changes, Central Bank Governor Indrajit Coomaraswamy said.

Sri Lanka had agreed on a staff level agreement for the final phase of a three year deal which ends next year by October 26 when President Maithripala Sirisena suddenly appointed Mahinda Rajapaksa as Prime Minister, triggering a political crisis.

"The IMF would want to see what the government is, whether the government is in place, and whether they would want to change elements of what was agreed on the 26th," Coomaraswamy told reporters.

"Until the government is in a position to tell the IMF it is on hold."

Sri Lanka was expecting a staff report on the current 5th review of the program to go to the Board of the IMF in November with a staff level agreement in place.

Coomaraswamy said according to recent statments Sri Lanka is expected to market price fuel, but not through a monthly formula. Tax cuts announced and implemented after the appointment of Rajapaksa was estimated to cost about 0.3 percent of gross domestic product, he said.

Other changes required changes to tax laws in parliament.

He said the political crisis had also slowed some programs, and spending may slowdown for the moment.

Sri Lanka’s soft-peg with the US dollar is now again under pressure.

A soft-peg gets de-stabilized whenever a central bank prints money to keep interest rates down and defend a peg at the same time by printing money (sterilizing forex sales) to maintain reserve money, analysts have said.

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The falling currency then triggers capital flight and exporter hold backs.

Analysts and economists have called for the a currency board to be set up of the country t be dollarized to stop the currency sliding and end the repeated bailouts by the IMF, since the soft-peg was set up in 1951.

In the latest move the central bank cut reserve ratio to dump money into the banking system to maintain reserve money, but also raised rates by 50 basis points to 9.0 percent. (Colombo/Nov15/2018)

 

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