Sri Lanka to begin talks with IMF on new program: finance minister

COLOMBO (EconomyNext) – Sri Lanka will begin talks with the International Monetary Fund on a possible program with the new administration keen on restructuring the country’s debt, finance minister Ravi Karunanayake said.

"We are initiating discussions on a new program," Karunanayake said. "Our debt is almost 7.2 trillion rupees so we need to ensure that we reduce the cost."

Sri Lanka has borrowed heavily from China over the last few years adding to the debt including tens of billions of rupees spent on airports and ports at inflated costs, Karunanayake said.

"Who is going to pay for this," he asked.

Sri Lanka’s foreign reserves have also been slipping with annual repayments of about 500 million US dollars to the IMF and domestic credit growth starting to pick up in the last quarter and some foreign held rupee bond sales held by foreigners also taking place.

Initial talks with IMF officials are expected to take place this week.

"We will not be dictated to by any of these multilateral agencies," he said. "We will do what is good for the country not what is mandated or dictated by any of these institutions."

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Sri Lanka’s new administration enjoys goodwill among the major Western shareholders of the IMF, World Bank and ADB.

But an earlier administration by Karunanayake’s United National Party lost popularity among state workers partly due to program items aimed at reducing the burden of the state on ordinary people.

Sri Lanka’s foreign reserves dropped to 8.2 billion US dollars by year end from 9.4 billion US dollars in August, according to Central Bank data released so far.

A 500 million US dollar sovereign bond is also expected to be repaid this month.

Analysts have warned earlier that with credit growth picking up coupled with IMF repayments foreign reserves will fall leading to nervousness among some investors who gain comfort from large stocks of relatively idle forex reserves. (Sri Lanka may lose forex reserve beauty contest amid ultra-low interest rates- Bellwether).

The Central Bank has kept about 300 billion rupees of liquidity generated from dollar inflows temporarily dammed up through term repo auctions, which when loaned out will result in forex reserves also being depleted when the exchange rate is defended.

If the exchange rate is not defended and liquidity to be reduced (unsterilized sales of foreign exchange) an inflationary third-world-style crawling peg is the inevitable result.

The rupee has fallen to about 132 from around 130 to the US dollar, over the past three months but the US dollar has fundamentally strengthened, resulting in lower commodity prices and lower inflation in all dollar pegged countries.

The Central Bank failed to retain profits on its reserves in the past few years, making large transfers to bridge the deficit and lost an opportunity to build up permanent reserves to make up for IMF repayments, the analyst Bellwether has said.

Sri Lanka has suffered chronic currency depreciation and balance of payments crises since a central bank was created in 1950 and its ongoing operational practices also contribute to making Sri Lanka’s rupee a third world ‘crawling peg’ analysts have said.

Sri Lanka is an ‘IMF prone’ or ‘BOP crisis prone’ country due to the lack of a classical understanding about the link between domestic credit and foreign exchange and the prevalence of Bretton Woods era neo-Mercantilist thinking, they say.

Bretton Woods was a global system of unstable dollar pegs that collapsed in the early 1970s amid exploding commodity prices and inflation.

The country needs fundamental currency reforms to prevent chronic currency debauchment and reduce income inequalities and destruction of salaries of wage earners and savings of the old and the weak, some analysts say.

Others have also called for the Central Bank to be abolished and a Singapore or Hong Kong style currency board to be set up to safeguard the poor and constrain the ability of the state to impoverish the population through ‘competitive exchange rates’ and other monetary interventions.

Sri Lanka’s Rajapaksa regime also lost power due to economic hardships imposed by a depreciation of the rupee from 110 to 130 and the subsequent economic downturn that comes from a balance of payments crisis.

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