Sri Lanka’s new administration to re-negotiate IMF deal

ECONOMYNEXT – Sri Lanka’s new administration will re-negotiate an ongoing agreement with the International Monetary Fund, a top official said.

“We would not abrogate it,” Nivard Cabraal, senior economic advisor to the Prime Minister who is also the finance minister said.

“We would only re-negotiate the terms of the agreement to suit the new policy framework.”

The three year agreement is in the final stages.

Sri Lanka’s central bank gets into frequent balance of payments crises and the rupee collapses as it prints money to artificially push down interest rates, while maintaining a peg to collect forex reserves.

Sri Lanka entered into a three year agreement with the International Monetary Fund after the central bank printed money in 2015 and 2016 trying to keep interest rates down, and sterilized interventions over 100 percent to maintain excess liquidity.

Separately the central bank also targeted a real effective exchange rate and an output gap, a variation of so-called ‘full employment’ policies that triggered balance of payments trouble at the Fed and Bank of England in the 1960s and 1970s and stagflation in the real economy.

In 2018, within the agreement, the central bank against printed money to keep rates and triggered two runs on the currency, as there were no ceilings set on domestic assets of the central bank under the agreement, or a bar on sterilization of interventions to restrain the monetary authority, analysts have said.

After printing large volumes of money through open market operations, the central bank then forced the Treasury to place trade controls, new exchange controls and import letters of credit were also slapped, to cover the monetary policy errors.

The current last stage was renewed after some of the trade and exchange restrictions were removed. They were variously deemed prohibited capital flow measures or multiple currency practices.

Amid stagflation in the broader economy from the last currency collapse with growth at 1.6 percent and inflation over 4 percent, Sri Lanka’s new administration has announced tax cuts to boost economic activity. (Colombo/Nov30/2019)