Sri Lanka to resume talks on current program with IMF
ECONOMYNEXT – Sri Lanka is to resume talks with the International Monetary Fund in February when a team is due to visit, with the possibility of an another program also in the offing, officials said.
Finance Minister Managala Samaraweera said talks will resume with an IMF team that is due to visit Sri Lanka on February 14.
Treasury Secretary R H S Samaratunga said the talks will centre on an existing 3-year program due to end this year.
There may be a possibility of another arrangment with the IMF later.
Sri Lanka’s Central Bank has said a monitoring program was under consideration. An IMF program may help Sri Lanka go to international capital markets.
Sri Lanka is due to present a budget in parliament on March 05 for 2019, after a regular presentation in November was delayed due to a political crisis.
IMF programs are linked to budgets and monetary policy.
Sri Lanka missed foreign reserve targets in 2018 as the Central Bank printed tens of billions of rupees to cut interest rates in the first quarter as the economy recovered and stopped mopping up inflows amid an exchange rate targeting exercise based on multiple convertibility undertakings.
Analysts have pointed out that if the IMF requires the Central Bank to collect forex reserves, the monetary system has to be pegged to the balance of payments and the Central Bank cannot print money when the inflation index shows a low number, without creating currency pressure.
Although a reserve target has been made (foreign assets floor), implying a strong side convertibility undertaking, the IMF program did not contain a domestic asset ceiling to ensure that monetary policy will be compatible with a strong peg.
Instead, an inflation target was set, which requires a floating rate with no ability to collect reserves, which has led to balance of payments pressure, when other convertibility undertakings, including a real effective exchange rate index and preventing a ‘disorderly adjustment’, are applied.
In April, the Central Bank stopped reducing domestic assets and started printing money to cut rates, generating pressure on the rupee.
The contradictory targets have led to BOP pressure within IMF programs.
Sri Lanka’s Central Bank is now also operating without sterilisation securities after it runs out of Treasury bills bought to generate the balance of payments crisis. (Colombo/Feb07/2019 – SB)