Financial Times

Mixed reaction to IMF Loan, BOP position must be improved

By Natasha Gunaratne

The US$2.5 billion International Monetary Fund (IMF) loan has brought mixed reactions from all quarters from politicians to economists and Central Bank (CB) officials. Although the stock market reacted to the news this week with healthy trading levels, some economists and opposition leaders feel the CB and the government must do more to correct and strengthen the macroeconomic fundamentals and improve the Balance of Payment (BOP) position.

The Sunday Times exclusively reported on January 18, 2009 that economists and exporters were urging the government to either devalue to rupee or seek a bailout package from the IMF to avoid a foreign exchange crisis.

The following day after the Sunday Times lead story, the CB Governor Ajith Nivard Cabraal and other CB officials were quoted in several media reports saying there was no need for devaluation or the support of the IMF. In late February 2009, the CB announced that it was seeking a US$1.9 billion loan from the IMF.

Principal Researcher at the Point Pedro Institute of Development Muttukrishna Sarvananthan said Sri Lanka requested the US$2.5 billion, which is 400% of Sri Lanka’s quota, than the originally sought US$1.9 billion due to several events that transpired after the original application was made to the IMF in late February 2009.

The civil war which ended in May 2009 created additional fiscal burdens and requirements to the government in terms of relief, rehabilitation and reconstruction to the Internally Displaced Persons (IDPs). Dr. Sarvananthan said the government of Sri Lanka and the IMF had to factor in the latest fiscal and balance of payment position. He said the overall balance of payment position has worsened since late February in spite of the marginal increase in gross official reserves by end-June compared to end-February.

Dr. Sarvananthan said there have been no public statements about the conditions, benchmarks or policy reforms by the IMF or the government. Since the Sri Lankan government has blocked the public release of the latest Article IV consultation undertaken by the IMF late last year, he said it is highly unlikely that the conditions will be made public. However, broad policy recommendations by the IMF is expected to be the following - reduction of budget deficit to a sustainable level (circa 5% of the GDP), increase government tax revenue (not necessarily through increase in tax rates or additional taxes) through curtailing tax exemptions and tax holidays, minimize CB intervention in the foreign currency market so that rupee could depreciate as per demand and supply in the foreign exchange market.
He said that based on a meeting he had on June 29 with senior IMF officials in Washington D.C., the IMF will re-establish its office in Sri Lanka within the CB soon in order to closely monitor the safeguards. The IMF office was closed in January 2007.

Economist Sirimal Abeyratne said the US$2.5 billion stand by arrangement will improve Sri Lanka's reputation in the international community, help investor confidence and greatly help the country in its development efforts in the post war era. He commented that the day after the impending loan approval was announced by the IMF’s Executive Director Dominique Strauss-Khan, the performance of the stock market improved from the past several weeks.

Dr. Abeyratne said the loan should help improve the balance of payments position which is currently in bad shape. He added that the loan will also most likely be used to repay previous long-term and short-term commercial loans that are due to be settled this year. Although the conditions in the Letter of Intent (LOI) have not been made public, Dr. Abeyratne said there are conventional conditions countries must adhere to in order to secure IMF loans such as improving their balance of payment position and getting the budget under control.

UNP Parliamentarian Kabir Hashim said the government should make the Letter of Intent (LOI) public as it lays down all the terms and conditions the government must adhere to in order to secure the stand-by arrangement. “If the government is transparent, the LOI should be made available for public consumption.” Mr. Hashim said the government should also inform the public as to why there was a delay in sending the LOI which also held up the loan. He added that by accepting the loan, the Sri Lankan government has created a foreign exchange crisis and a balance of payments crisis.

Mr. Hashim said the events that led to the need for the IMF loan has to be borne by the government and the CB for its fiscal policy. “In parliament on many occasions, the opposition pointed out that the rupee had to be devalued because there was money printing which led to inflation. Even at that point, the government refused to listen and reverse policy.”

Mr. Hashim added that part of the problem is the failure of the government to implement the 17th Amendment where even the members of the Monetary Board of the CB have not been appointed in the proper manner. “The government is also taxing people through their noses for milk powder, dahl and flour. They are even taxing phone bills, water bills and telephone bills,” he said.. “This taxed money from the poor is being used to maintain a huge inefficient government and a public sector.”

When the IMF money runs out, Mr. Hashim said the government may not find another institution to borrow money from. “For the government, this is not about getting loans from outside but putting their house in order and stopping waste and corruption. The government needs to learn to balance income and expenditure.”

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