A mission from the International Monetary Fund (IMF) will be in Colombo in a few weeks time to get a general assessment of the economic situation as the third tranche of the US$2.6 billion IMF stand-by arrangement is under consideration.
In an interview with the IMF Resident Representative in Sri Lanka Koshy Mathai this week, Dr. Mathai said Sri Lanka’s monetary and fiscal policy has been good and that the country’s reserve position is also strong although he expressed some concerns about difficulties meeting the 2009 year end fiscal target.
“It was great that fiscal targets in July 2009 and September 2009 were met but we haven’t seen the most recent statement,” Dr. Mathai said. “Given the government’s public statements, we are concerned that it might have been difficult to meet the end-year fiscal target. This will be a topic of discussion for the upcoming mission.”
Going forward, the government wants to reduce the fiscal deficit to 6% in 2010 and 5% in 2011. Dr. Mathai said this is a substantial adjustment which excludes any provisions for reconstruction to the North and East. He said the debt to GDP ratio at 81%is high and means big interest payment are being generated. “The goal is to run tight fiscal policy.”
Dr. Mathai said revenues collapsed at the beginning of 2009. There was a foreign exchange problem and imports collapsed which also meant tax revenue from those imports decreased. He said a turnaround began when imports and revenue started recovering.
The Central Bank (CB) was able to build up its reserve position which had dwindled to low levels in 2009. Rebuilding the reserves was a pressing need, said Dr. Mathai, and the IMF stand-by arrangement helped in getting the reserves up. “The reserve situation turned around dramatically from around US$1 billion to five times as much. The IMF money that came in contributed as well as foreigners willing to invest in Sri Lankan assets. The US$500 million bond issue last year was successful. There are also investors in the treasury bill and treasury bond markets.”
He added that the illiquidity of the secondary market in longer-tenor treasuries means that investments cannot easily be unwound overnight. “It gives some protection against borrowed reserves going out immediately, but we still make a distinction between borrowed and non-borrowed monies.” Dr. Mathai cautioned that a lot of the money in the CB reserves is borrowed and could go out.
Remittances which make up around 7.5% to 8% of GDP picked up from levels below 5% during the financial crisis. Dr. Mathai said trade in Sri Lanka is recovering somewhat moderately.
He said the CB is cautious and maintains a tight monetary policy. “There are no signs of demand side inflation building up but the CB doesn’t want to squander its credibility by loosening the policy too much. We are not urging either cutting or hiking interest rates right now.”
Dr. Mathai said banks were not passing on interest rate cuts to the real economy. “We were not keen on the manner in which interest rates were brought down via the presidential directive. The packaging was a bit statist and old-fashioned sounding but its effects were salutary.”
Credit growth to the private sector was negative for a long time. Banks were cautious and unwilling to give credit, consumers were not spending and corporates were cautious in investment plans. Dr. Mathai said consumers are now spending, businesses are starting to invest and there is demand for credit from credit worthy borrowers.
“The IMF is not too concerned with inflation going up,” he said. In 2008, oil prices were high and headline inflation went up to 28%. In 2009 after oil prices dropped, Dr. Mathai said inflation is expected to go up as it is a natural occurrence and not because of the actions of the CB. “I am not sure where inflation will end up by the end of the year but oil prices should stay in the low 80 dollar range.”
“Global growth has recovered faster than we at the IMF expected,” Dr. Mathai said. The IMF growth forecast for Sri Lanka in 2010 is 5.5%. Globally, growth estimates were revised from around 3.1% to 3.9%. Global trade and domestic demand in various countries is strengthening.
Dr. Mathai said Sri Lanka needs tax reforms to boost revenue and that the government should tackle spending pressures to reduce the deficit. “It is not our role to interfere in specific policy initiatives of the government,” he added. “The IMF program restricts itself to key macro variables like the overall stance of fiscal policy. How particular initiatives would fit within an overall stance consistent with macroeconomic stability is something we always are happy to discuss with the government.” |
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