The International Monetary Fund (IMF) mission visiting Sri Lanka said the increased inflows of private foreign funds into the local bills and bonds market, were not a risk to the country under current Central Bank policies.
IMF officials addressing the media |
The IMF team said the risk of these investments suddenly pulling out, was mitigated by the Central Bank policy of building foreign exchange buffers. “There has been a lot of foreign capital into the rupee bond and bill market. We believe the Central Bank policy of building a reserve cushion, to the extent of that capital inflow, is the right thing. As long as the Central bank creates a buffer to these capital inflows I don’t see a problem,” said the IMF Mission Chief, Brian Aitken speaking at a press conference this week. The IMF team was in Sri Lanka to review the country’s performance under the IMF US$ 2.6 billion Stand-By-Arrangement.
The IMF said the increased foreign investments in bonds were a positive sign. “These inflows are not just short term T-bills but also long term bonds, which is a positive development because it shows investor interest in long term development of the country,” said Mr Aitken.
On building foreign exchange reserves the IMF said it would be better for Sri Lanka to build reserves through export growth and remittances, rather than borrowings.
“The Central Bank was building a war chest of reserves through debt. We would prefer if Sri Lanka built up reserves from exports and remittances rather than borrowings,” said Mr Aitken. However, the IMF team also noted that since the end of the war remittances inflows have increased. “Net international reserves have been strong because of remittances. There has been a big boost in remittances following the end of the war” said Mr Aitken.
War reconstruction
The IMF team also said the current IMF programme allows for increased government expenditure for war reconstruction - despite setting difficult deficit targets on the government budget. The government has said it will keep its budget deficit at 7% of GDP in 2009 and reduce it to 6% in 2010. “We have anticipated, on top of underlying fiscal adjustments, some room for reconstruction spending. econstruction is scheduled really only for next year.
Some small reconstruction will happen this year but that has already been accommodated in the 7% deficit target. The reconstruction costs for 2010, when reconstruction really starts, is outside the 6% underlying budget deficit target,” said Mr Aitken.
Taxes
On meeting the fiscal targets, the IMF team said the government seems to be moving in the right direction and said government revenue has improved.
The IMF officials said they did not advocate cutting down on social welfare expenditure as a means of cutting government expenses. Instead, the government was advised to maximise incomes from its current tax regime and to cut down on unnecessary costs. The IMF officials noted that Sri Lanka’s tax revenues were still below the regional average.
Payout No 2
The IMF officials said the second tranche of the US$ 2.6 billion loan can be expected in mid-October, once IMF Board approval is given. The IMF mission did not indicate any obstacles to releasing the second IMF payout. “The second tranche should be disbursed in the second half of October, if it is approved by the IMF Board,” said Mr Aitken.
Sri Lanka’s economy is seen to have done better than expected since the approval of the IMF loan in July this year.
As a result, the IMF has revised Sri Lanka’s economic growth projection upwards for 2009, from a 3% GDP growth to 3.5%. |
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