Sri Lanka policy predictability may improve with IMF; meeting targets key: Fitch

ECONOMYNEXT – Sri Lanka’s program with the International Monetary Fund can improve policy predictability and help strengthen the economy, which has been hit by state worker salary hike and loose monetary policy, Fitch Ratings officials said.

In 2015, Sri Lanka policy had deteriorated, Andre Calhoun, a senior director from Fitch’s Sovereign rating team said.

"We had loose monetary policy, rapid credit growth, a fairly large increase public sector wages, and a substantial increase in the fiscal deficit and pressure on the balance of payments," he said.

"This year, we’ve had a 2 percent rise in VAT rates and monetary tightening as well. Policy has reversed course towards a more sustainable direction, which is positive."

Analysts say Sri Lanka has a central bank that follows pro-cyclical policy and worsened the negative fallout of a revised high spending budget in January 2015 with a rate cut in April.

It also released tens of billions of rupees in liquidity sterilised through term repo deals, in a third loose monetary policy measure.

During the second half of the year, it started wholesale purchases of Treasury bills by rejecting real bids for weekly auctions – the agency’s most deadly loose monetary policy tool – to boost credit and domestic demand.

Sagarica Chandra Associate Director at Fitch said that securing the IMF program was positive for Sri Lanka. It could ‘anchor policy predictability’. Stable policies could bring back lost investor confidence.

Sri Lanka was facing tighter external fudding conditions, with large rollovers over the short term.

But the program has a series of reforms aimed at trade and tax reforms, which could improve the efficiency of the economy, make it more competitive and draw foreign direct investment as well.

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"The real challenge is meeting the criteria," Chandra said. "That is something we are waiting to see." (Colombo/June16/2016)
 

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