ECONOMYNEXT – Sri Lanka will seek a bailout from the International Monetary Fund next year as global economic conditions are set to be unstable, Prime Minister Ranil Wickremesinghe said.
He said other than the US, global growth was slowing and there was a possibility of ISIS rebels creating greater instability in the Middle East, which would hurt Sri Lanka.
"I think it is prudent in the circumstance of all the international developments that we start discussing a stand by arrangement with the IMF," Prime Minister Ranil Wickremesinghe told parliament.
"Generally I would not have done it, but I told the Finance Minister to discussing with the IMF. If a difficult time comes, we will have to be prepared and we should try to reduce the burden on the people."
The IMF also has a precautionary facility but a stand-by loan is the classic bailout loan. The ousted Rajapaksa regime had to be bailed out twice by the IMF.
In 2009 Sri Lanka was hit by property bubble, fuel subsidy credits and a run by foreign investors on Sri Lanka rupee bonds and in 2011 it was money printed to support fuel subsidies that generated the balance of payments crisis.
The current crisis was caused mostly by money printed to pay state salaries and to keep interest rates down which also triggered foreign investor outflows.
Sri Lanka had already borrowed 1.1 billion dollars from Reserve Bank of India. But unlike IMF loans there is no requirements to follow prudent monetary or fiscal policy to correct the underlying problems that is triggering the balance of payments pressure.
A steep salary increase to state workers last year had given a body blow to Sri Lanka’s government finances and the budget 2016 has slapped a series of taxes on the people to pay the bloated wage bill and other subsidies.
The boated state is Sri Lanka’s key constraint to raising the living standards of the poor and the less affluent, critics say.
The central bank compounded the problem by cutting rates and printing money, following perhaps the worst monetary policy seen since 2004 in terms of outright monetization of debt, according to long term watchers of the the monetary authority.
Wickremesinghe said Sri Lanka’s budget deficit of 5.9 percent for 2016 has been viewed as negative and he hoped to bring it down to 5.5 percent.
He said the new administration had not abandoned the path to fiscal consolidation.
The IMF had also been invited to help reform Sri Lanka’s taxation system he said. There were revenue losses in customs for example which was still not properly modernised he said. (Colombo/Dec02/2015)