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Stakeholders in Sri Lanka’s IMF programme recognise need for reform: top IMF official

IMF Asia and Pacific Department Director Krishna Srinivasan

ECONOMYNEXT – There is broad recognition among various stakeholder groups that Sri Lanka has been through a crisis and ambitious reforms are necessary despite some differences of opinion, a top International Monetary Fund (IMF) official said after discussions with said stakeholders.

IMF Asia and Pacific Department Director Krishna Srinivasan told a media briefing on Monday May 15 in Colombo that he had met with a “variety of stakeholders” including trade union representatives during a four-day IMF mission ahead of a review due in September.

“There are differences of views in terms of reform priorities, the pace of reforms, and so on. But there is a broader recognition that the country was in crisis and that ambitious reforms are needed ,and that they should be pursued in a comprehensive way,” said Srinivasan.

“You’ll have various stakeholders and they’ll have different views. That’s to be expected,” he added.

Srinivasan was responding to a question posed by EconomyNext on resistance to some of the IMF-prescribed reforms, particularly with regard to a hike in personal income tax which was met with strong protest.

Asked about public-buy in for the painful reforms that Sri Lanka is required to undergo as part of the crisis-hit country’s 17th IMF programme, IMF’s Senior Mission Chief for Sri Lanka, Asia and Pacific Department Peter Breuer said that the public may perceive an overlap between the crisis and the reforms needed to overcome the crisis.

“In people’s perception, these two things are linked and they may not like it. But Sri Lanka is a good example of what happens when the IMF isn’t here,” he said.

Breuer said the pain of the crisis was already palpable long before the IMF’s 2.9 billion dollar extended fund facility (EFF) was approved in March.

“You know it better than we do. The pain was clear and present. What the IMF does is it provides some financing that cushions the transition from a very harsh reality to a new equilibrium. It gives a little bit of breathing space to let these necessary reforms take place and help the country emerge from the crisis [in the medium term],” he said.

IMF Resident Representative in Sri Lanka Sarwat Jahan said she has personally has a first-hand understanding of what the people have been going through with inflation, high interest rates and loss of jobs having a tremendous impact.

“But we’re also here to work with you so that, through the stabilisation process, Sri Lanka will come back to where it was perhaps two years ago,” she said.

In the absence of a survey on public support for the IMF programme, it is hard to accurately assess whether there is wide acceptance of the government’s reform agenda that is largely in line with conditions posed by the international lender. The reforms include revenue based fiscal consolidation, restructuring of state-owned enterprises and other measures that are politically sensitive.

Sri Lanka’s opposition parties, too, have also been blowing hot and cold on the reforms. The main opposition party, the Samagi Jana Balawegaya (SJB), which was among the first to urge the then government to approach the IMF for a bailout in early 2022, has now taken a more cautious tone. Spokesmen for the party have alluded to a unique economic vision the party possesses with regard to macroeconomic development that doesn’t necessarily include the IMF


Sri Lanka’s SJB no longer enamoured of IMF, promises new govt in three moons

In a meeting with SJB and a number of other opposition MPs following on Tuesday May 16, SJB and opposition leader Sajith Premadasa told the visiting IMF officials that Sri Lankans are undergoing unbearable hardships due to poverty and the tax hike while small and medium enterprises are also struggling. Seeking IMF assistance in overcoming these issues, Premadasa asked the officials to pressure the government to be more transparent with how it spends the funds it receives.

The leftist National People’s Power (NPP) led by the Marxist-Leninist Janatha Vimukthi Peramuna (JVP), on the other hand, has been increasingly hostile towards IMF-backed reforms. The party, which has been gaining ground at least according to one opinion poll, was not overtly opposed to IMF assistance at the onset of Sri Lanka’s crisis early 2022, but has turned up the volume on its anti-IMF rhetoric since the appointment of President Ranil Wickremesinghe whose administration successfully negotiated the IMF deal.

One reason for the scepticism levelled at the latest IMF programme is that it is Sri Lanka’s 17th, the previous 16 not having delivered the anticipated results. Addressing this concern, Srinivasan said at Monday’s press briefing that this time it’s different in one critical way.

“Debt is assessed to be unsustainable. In the past, the crises were more of a balance of payments nature. What do you do to ensure that debt is sustainable? That requires some very strong reform efforts – even if you talk about revenue based fiscal consolidation and so on, which is pretty ambitious. There is little choice. If you don’t do these reforms, your debt is going to get worse and you don’t want that,” he said.

The authorities have so far shown commitment to the reforms they have undertaken, he said, as evidenced by the government meeting all prior actions that were required before IMF board approval on the loan.

“It’s important to recognise that they showed commitment to the reform efforts. Now, going beyond that, what is different is that it goes towards building greater ownership and buy-in from the population at large,” he said.

Efforts taken by the government to address corruption vulnerabilities, one of the pillars of the programme and the governance diagnostic requested by the government should “assuage people that these issues are being taken seriously,” said Srinivasan.

“We recognise that this programme is very ambitious and a difficult one, he added.

The official said the IMF also recognises that the programme will have a disproportionate impact on the poor and vulnerable. The floor on social spending that the organisation has prescribed is among the various elements that will go towards more public buy-in, he said.

“There is reason to believe that there is more commitment and this programme will succeed,” he added. (Colombo/May17/2023)

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  1. sacre blieu says:

    How can the country recover even in the slightest when the president and government are obstructing the path to justice? Not even, in spite of the evidence, one fraudster has been prosecuted, nor a rupee has been recovered.

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  1. sacre blieu says:

    How can the country recover even in the slightest when the president and government are obstructing the path to justice? Not even, in spite of the evidence, one fraudster has been prosecuted, nor a rupee has been recovered.

Sri Lanka bank bad loan expansion slows in June quarter

ECONOMYNEXT – Bad loans at Sri Lanka’s banks, measured as ‘Stage 03’ loans to total loans and advances expanded by 0.5 percent to 13.7 percent in the second quarter of 2023, central bank data shows, which is a slower pace than the previous three quarters.

Bad loans went up 1.9 percent in the September 2022 quarter, and 1.0 percent in the December quarter and 1.3 percent in the March quarter, as debt moratoria also ran out.

In Sri Lanka and other countries, large spikes in bad loans are usually ‘hangover’ of macro-economic policy deployed target growth.

Amid a stabilization effort, credit can also contract, making the bad loans bigger.

Sri Lanka’s bad loans usually spike after period of credit growth re-financed by printed money (reverse repo injections made to artificially target a call money rate), and not real deposits, which then trigger balance of payment deficits which require steep spikes in rates to restore monetary stability.

Sri Lanka economic bureaucrats cut rates with the printed money in the belief that there is a growth shortcut by cutting rates to target real GDP, which has led to external crises since a central bank was set up in 1950.

However, policy worsened after 2015 when the International Monetary Fund taught the country to calculate potential out and dangled the number in front of a central bank which had taken the country to the agency multiple times after running down reserves.

In December 2019, inflationists also cut taxes on top of rate cuts, deploying the most extreme Cambridge-Saltwater macro-economic policy ‘barber boom’ style with predictable results.

When rates are hiked to restore monetary stability, bad loans rise and a currency collapse destroys purchasing power of the consumers and sales of firms which had taken loans.

When central banks cut rates with liquidity injections bad loans also go up in floating rate regimes (the housing bubble), but balance of payments are crises are absent. (Colombo/Sept29/2023)

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Sri Lanka expects restructuring decisions from all creditors: Minister

ECONOMYNEXT – Sri Lanka is engaging positively with all foreign creditors State Minister for Finance Shehan Semasinghe said this week as an International Monetary Fund review hangs in the balance on restructuring.

“All creditors are engaging positively with us,” Minister Semasinghe said. “We expect decisions from all our creditors. For us earlier the better.”

Sri Lanka is negotiating with Paris Club creditors and several non-Paris Club creditors like India and Saudi Arabia together and China separately. China is an observer in the Paris Club meeting.

The Paris Club held a meeting on Sri Lanka on September 22 with China as an observer.

Though Paris Club creditors have a well-oiled mechanism to give a quick decision on countries that default, the entry of China which had earlier not been willing to restructure debt, but was willing to give fresh loans to repay instalments, have complicated matters.

“Let me say again that we support Chinese financial institutions in actively working out the debt treatment with Sri Lanka,” China’s Foreign Ministry spokesman Wang Wenbin told reporters on September 26.

“We are ready to work with relevant countries and international financial institutions to jointly play a positive role in helping Sri Lanka navigate the situation, ease its debt burden and achieve sustainable development.”

There are expectations that Sri Lanka may be able to wrap up a preliminary deal with official creditors as early as October 2023 around the time IMF’s annual sessions take place in Morocco.

Sri Lanka President Ranil Wickremesinghe is to make an official visit to China October.

Sri Lanka is expected to finalize a refinery deal in Hambantota among other investments during the visit, according to reports.

Completing Sri Lanka’s external debt restricting is key to completing the first review of the island’s reform and stabilization program with the International Monetary Fund, which is expected in October or November.

Without completing a review Sri Lanka will not have formal IMF economic targets for December, and no disbursement of the second tranche.

World Bank and IMF with the G20 group, which include India and China has formed Global Sovereign Debt Roundtable has been trying to fine tune debt restructuring going beyond the Paris Club.

IMF’s Senior Mission Chief for Sri Lanka Peter Breuer said Sri Lanka’s debt is ‘spread around quite a bit’ to a question whether an IMF review could progress without China, possibly indicating that the lender would prefer to have the country on board.

“This is a process that we have that applies in the case of Sri Lanka to both official creditors, meaning other countries that have lent to Sri Lanka on a bilateral basis as well as commercial creditors, for example, bond holders,” Breuer told reporters in Colombo.

“And as you know, the government is in discussions with all of these groups. In Sri Lanka’s case, the debt is spread around quite a bit externally and domestically.”

READ MORE Sri Lanka’s external debt restructure ‘progress’ decision by IMF exec board

Out of Sri Lanka’s 36.59 billion US dollars of central government debt, multilaterals held 29.8 percent or 10.9 billion US dollars which will not be restructured.

Bilaterals held another 29.9 percent of which Paris Club was 12.1 percent and China 12.7 percent.

Of the commercial debt which was 40.3 percent, China Development Bank held another 6 percent, relating to a monetary instability loan it has given as a bailout without asking for rate hikes to stop output gap targeting.

China without AIIB held 6,850 million US dollars or 18.7 percent of central government external debt. (Colombo/Sept29/2023)

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Sri Lanka can build strong tourism ‘eco-brand’: UN official

ECONOMYNEXT – Sri Lanka can build an ‘eco-brand’ catering especially to younger tourists who feel strongly about the environment, United Nations Resident Representative to Sri Lanka, Azusa Kobota said.

About 70 percent of global travellers prioritise sustainability in their holiday choices, marking a ten percent increase from 2021, while around 30 percent of travellers feel guilty about flying, due to carbon emissions, she said.

“As the world embraces green thinking during this time of economic recovery efforts, the objective of the tourism sector cannot simply be about increasing the number of inbound tourists,” Kobota said at an event marking World Tourism Day in Colombo.

“It has to be about enhancing their experience through green lenses, by implementing a responsible, eco-conscious paradigm for the sector and building a stronger eco-brand around the sustainable agenda for Sri Lanka,”

“This is no longer about reducing the trade offs between growing the industry and protecting the environment.

“We must see nature as our asset and solutions to be obtained for the exponential growth for our future generations.”

The sustainable tourism market is estimated to have earned 195 billion US dollars in 2022, and is expected to reach about 656 billion US dollars in 2032, she said.

“Tourists, particularly the younger generations from gen X,Y,Z are deeply, deeply conscious about the long term choices of their actions, and the adverse impact of tourists on the environment.

“Statistics show that a significant proportion of global travellers, about 30 percent, feel guilty about flying due to the environmental impact and 22 percent say they actively prefer public transport and bicycle rental options, over renting a car.”

Sri Lanka welcomed one million tourists by September 26 and is expecting more that 1.5 million tourists by the end of the year. (Colombo/Sept29/2023)

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