Sri Lanka IMF talks points to austerity ahead: economist

ECONOMYNEXT – Sri Lanka’s desire to get a loan from the International Monetary Fund (IMF) indicates the island is close to an economic crisis and points to austerity ahead, an economist said.

The government has said it is holding talks with the IMF for a new facility as it grapples with a high budget deficit, falling currency and unstable foreign exchange reserves.

Saman Kelegama, Executive Director of the Institute of Policy Studies, said the island has about seven billion US dollars in reserves but will have to pay out 4.5 billion dollars in debt repayments in 2016.

"The bulk of the reserves are borrowed, not earned, funds," he told a forum on the island’s economic outlook held by Asia Securities in collaboration with Verité Research, a think-tank.

Sri Lanka has approached the IMF, called the ‘lender of last resort’, because it is close to a crisis situation, Kelegama said.

"The IMF will give a huge loan at a low rate but with conditions to put our domestic house in order."

IMF money could help fix Sri Lanka’s immediate economic problems but conditions could include dealing with loss making state owned enterprises, cutting subsidies, raising taxes and getting rid of excess labour in the government institutions.

"Going for an IMF loan points to some degree of austerity," Kelegama said. "We have an overheated economy. We need to bring down the heat by implementing austerity measures."

Kelagama said recent government moves to shore up foreign exchange reserves through a swap with the Reserve Bank of India and a Belgian investor were temporary measures and "won’t fix the economic problem."

Sri Lanka’s budget for 2015 ratcheted up state spending hiking salaries for state workers which were financed by borrowings.

Critics have said that the central bank also added fuel to the fire by pro-cyclically cutting rates and printing large volumes of money, putting pressure on the currency.

Instead of following any ‘state austerity’ the currency had started to fall sharply imposing ‘austerity’ on everyone including the very poor, critics say.

Despite rates being held in check by printing money banks on their own had started to raise deposit rates which will generate more resources to fund credit.