Sri Lanka seeks to avoid further rate hikes with IMF program: report

ECONOMYNEXT – Sri Lanka will borrow money from the International Monetary Fund and other donors and try to avoid further rates hikes, a media report said.

Central Bank Governor Arjuna Mahendran was quoted by Bloomberg newswires as saying the country was looking for between 1 to 1.5 billion US dollars under an IMF program.

Mahendran said he would not completely rule out a hike.

"…[A]t the moment I don’t think there is any necessity, because what we’ve already done to tighten monetary policy is having the desired effect," he was quoted by Bloomberg as saying.

The central bank pushed the country in to balance of payments trouble by keeping rates artificially low and driving credit to unsustainable levels by accommodating a runaway budget deficit with printed money (central bank credit).

The IMF has Sri Lanka to bring the budget back on track by raising more taxes from the people to finance a sharp rise in state salaries and subsidies.

The IMF funds go to the central bank and will generally be invested in the US, effectively bridging its deficit, but the program will also bring money from World Bank, the Asian Development Bank and Japan for the budget in Sri Lanka.

Mahendran said with the IMF program in place, Sri Lanka can also borrow from the market.

Sri Lanka has bloated public service and perhaps one of the largest cabinets of the world, keeping people poor.

Analysts who were watching central bank’s policy warned of the consequences almost a year before to pursue prudent policy before foreign investors started to sell bonds and rating agencies downgraded its credit, but they were ignored.

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The central bank has a steady history of resisting market interest rates and generating balance of payments trouble dating back to the early 1950s when it was first created.

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