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Wednesday October 5th, 2022

Sri Lanka President expects IMF staff level in late August

ECONOMYNEXT – Sri Lanka’s President Ranil Wickremesinghe said he expected a state-level agreement with the International Monetary Fund by late August, and executive board approval in September.

“My aim was to get into an agreement by July and get Executive Board approval by the first week of August, President Wickremesinghe told a meeting of local government officials in Kandy.

“Now it will delay to the end of August. Because after the first week there is a holiday.

“Then we can approve only in September.

“Due to all their groups (protesting) all became delayed. Without this agreement, no one will give money.”

Wickremesinghe when he was Prime Minister at first said he expected a staff level agreement by July but later said it will be in August.

The International Monetary Fund itself has not given any dates but said progress has to be made in debt re-structuring.

Sri Lanka’s debt advisors are still doing the analytical work on creditors and debt, the Finance Ministry said.

Sri Lanka will then have to start negotiations with creditors.

It is not clear to what level of progress with creditors IMF will require to approve a letter of intent and give the first tranche of money.

IMF typically gives money after it is no longer needed for imports after ending unsustainable credit and central bank injections with rate hikes and the money can be invested in usually US debt and show as reserves.

Sri Lanka however is still printing money and creating forex shortages.

Sri Lanka has the worst flexible exchange rate (soft-peg) in South Asia after Pakistan requiring frequent IMF bailouts after printing money to keep rates and rejecting bids to bond auctions (central bank re-finance of the private sector by re-purchasing bonds issued for past deficits).

After losing the credibility of the peg, the central also sterilizes dollar sales for imports, effectively monetary financing imports after losing reserves.

The instability worsened sharply after the end of a civil war when the IMF itself taught the trigger-happy central bank to calculate an output gap, spurring it to engage in stimulus and trigger balance of payments deficits.

In 2019 December, after two currency crises in 2015/2016 and 2018 from output gap targeting, economists also cut taxes adding fiscal stimulus claiming there was a ‘persistent output gap.’ (Colombo/Aug01/2022)

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