Sri Lanka may get relief from IMF repayments

COLOMBO (EconomyNext) – The International Monetary Fund has "favourably viewed" a request from Sri Lanka to defer repayments on an earlier loan as the island attempts to rebalance its debt servicing, Finance Minister Ravi Karunanayake said.

Karunanayake met IMF Managing Director Christine Lagarde this week and a mission boosted by its Asia Pacific Director Changyong Rhee is visiting Sri Lanka this week.

In the light of heavy debt servicing to countries like China, the IMF has favourably viewed Sri Lanka’s request for a deferment of their repayments, Karunanayake said.

Sri Lanka’s foreign reserves are estimated to have fallen by around 1.5 billion US dollars since August due to IMF repayments and also a pick-up in credit that was beginning to move unsterilized excess liquidity in the banking system, which would the hit the balance of payments.

Last year Sri Lanka made repayments of 487 million special drawing rights, or about 688 million US dollars on a 2.5 billion US dollar bailout following a balance of payments crisis in 2008/9.

In 2015 Sri Lanka has to make repayments of 352 million SDR or about 497 million US dollars in stages.

Though fiscal repayments made by borrowing Central Bank foreign reserves for Treasuries can be replenished by selling down the bills and curtailing domestic credit, IMF repayments are monetary policy neutral and drains forex reserves.

In times of global turmoil Sri Lanka also makes losses in its forex reserve book because the country has diversified too much out of the dollar which is its intervention currency, and to which the country is de facto soft-pegged in reality.

The situation has been further complicated because the Central Bank had failed to fully sterilize excess liquidity of about 350 billion rupees after the 2011/2012 balance of payments crisis, making the forex reserves backing the rupees unstable.

The Central Bank also made large profit transfers to the Treasury in recent years helping bring down the budget deficit by about 0.5 percent of GDP a year.





Analysts say any future IMF program with Sri Lanka should put ceilings of profit transfers to so that adequate resources are built up to make repayments and caution against diversifying too much away from dollar denominated assets.

Excess liquidity should also be sterilized permanently or for six months or longer based on whatever reserve target deemed suitable, or deduct the dollar equivalent of any excess liquidity that is sterilized short-term, from any reserve target that is set.

If a central bank allows interest rates to go up as soon as credit growth pick up, foreign reserves slightly above its domestic reserve money outstanding is sufficient to keep the exchange rate stable and the economy in balance.

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