ECONOMYNEXT – Sri Lanka may start talks with the International Monetary Fund for a new program, Central Bank Governor W D Lakshman said, after the visiting mission said the island has missed both budget and forex reserve targets for December ahead of the last review of a three year program.
Governor Lakshman said he had ‘long chats’ with IMF officials who were in the country.
“And the idea we have is perhaps to talk with them later on and develop a program within the kind of policy framework we agree, as long as that is permitted,” Governor Lakshman said.
“And the IMF team told me that is permitted. It is the country concerned that has to develop the program.
“On that basis I think there would be a discussion for a new program. Whether it is finalized easily is yet to be decided.”
Sri Lanka’s new administration has slashed taxes, taking away the bulwark of the IMF program which was based on so-called revenue-based-fiscal-consolidation.
An IMF mission that was in the country in the first week of February said Sri Lanka has missed a deficit and forex reserve target on the existing program.
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The program was anyway due to end in April with a review of December targets and a final tranche to be released. An election is also due around the time.
The main plank of the program so-called ‘revenue based fiscal consolidation’ has been reversed with a series of tax cuts from January 2020.
Sri Lanka ran into a balance of payments crises within shortly before and within the program as the quantitative targets lacked restraints on the central bank to contradictory policy that prevents a collapsed of a soft-peg with the US dollar.
With a combination of targeting a call money rate to generate inflation as high as 8 percent (a domestic anchor) and generate rupees to build forex reserves (effectively an external anchor) but with no ceilings on domestic assets to mop up the rupees, analysts had warned that the currency would collapse and Sri Lanka would end up with stagflation .
Sri Lanka ended 2018 with inflation of 4.8 percent and economic growth is estimated at around 2.6 percent of gross domestic product. (Colombo/Feb10/2020)