Balance US$ 800 ml. IMF loan poses problem for Govt.

The Central Bank and a visiting International Monetary Fund (IMF) delegation are discussing whether Sri Lanka should or not draw US$ 800 million, the final balance of the IMF’s US$ 2.6 billion Standby Arrangement (SBA).

If the balance is drawn, the entire loan will be converted into a higher interest rate facility. Central Bank Governor Ajith Nivard Cabraal said though every country was entitled to 300% of its quota in the IMF, which is $1.8 billion – and has been already drawn -- Sri Lanka was approved a loan in July 2009 of US$ 2.6 billion which is 400% of its quota.

According to IMF guidelines, the 300% quota loan comes at 1.1% interest whereas anything above that is at 3.1% interest. “The issue here is that if we take the balance US$ 800 million, the entire loan — US$ 2.6 billion — then gets converted to a 3.1% interest facility whereas we pay 1.1% only on US$ 1.8 billion and not draw any more,” he said. Mr. Cabraal said the decision to draw this balance or not would be made this week before the delegation left.

However United National Party parliamentarian and economist Harsha de Silva raised the question that if the CB had raised funds earlier at 6-7% interest in the commercial market, how could 3% interest be too much?

“The Governor, who is an accountant, should know better that 3% is cheaper than 6-7%. Furthermore the CB is planning to raise more funds this year (from the commercial market),” he told the Sunday Times.
Dr. de Silva, however, refused to comment on discussions a UNP team led by Opposition leader Ranil Wickremesinghe and including MPs Ravi Karunanayake, Dr de Silva and Eran Wickramaratne had with the visiting IMF team.

According to official sources, privy to the discussions but speaking strictly on condition of anonymity, contrasting views emerged when the team met Government and Opposition officials.

While the visiting mission expressed concern to the opposition over the use of the fund’s entire US$1.8 billion bail-out package by the Central Bank (CB) to defend the rupee, it had a more positive approach in meetings with the CB.

‘These were contrasting views, at least from the tenor and tone of the discussions,” one official said.
The official, close to the IMF discussions, said the flawed exchange rate management process was the biggest source of concern to the IMF. “They (IMF officials) were at a loss to understand why the rupee was being defended (so vigorously) with these foreign reserves,” he said.

However, in meetings with Senior Minister Sarath Amunugama, Treasury Secretary P.B. Jayasundera and Central Bank Governor Ajith Nivard Cabraal, the general tone was that the economy was on a sound footing.

Asked to comment on the discussions and the Fund’s concern over exchange rate management, CB Governor Cabraal said the use of reserves (to defend the rupee) was no more a priority issue.
“We needed 3.5 months worth of reserves (around US$ 4-5 billion) and then went on to raise US$ 8 billion. Granted, this has dropped to around US$ 6 billion but even at the time when it was at US$ 8 billion, we repeatedly said in statements (issued at that time) that this was in excess (of our needs). So this is not an issue,” he said.

On the discussions, the CB Governor said it went off well giving a chance to the two sides to examine the entirety of the 36-month, US$ 2.6 billion Standby Arrangement (SBA) and do a complete evaluation.
“The IMF gave us good ideas to go forward based on the (CB) roadmap,” he said.

The Business Times (the Sunday Times’ business section) last week exclusively reported that the CB was considering a fee-based, commitment programme where Sri Lanka could draw the US$ 800 million at a later stage, only if the necessity arose.

The decision to enter into a contract for a surveillance monitoring programme, a standard practice in any country that has completed a SBA facility, was also reported last week. While the monitoring facility is what both sides are in agreement, Mr. Cabraal said a decision on whether to draw the balance US$ 800 million or not would be made next week in the final round of discussions with the visiting team.

Referring to concerns of a rising trade deficit, he said the CB had paved the way for non-trade foreign exchange inflows to bridge the gap and even have a trade surplus by the middle of this year. (A trade deficit occurs when imports cost more than revenue earned from exports.) These ways are commercial banks and the private sector being able to access foreign funds, foreign direct investment inflows, remittances, portfolio investments in the stock market and negotiating a special US$1 billion facility for oil imports, he said.

“I can’t give details on the special oil facility as it is under negotiation but this will reduce our oil bill which was about US$ 4.5 billion last year against US$ 3 billion in 2010,” Mr. Cabraal said.

Other avenues of raising foreign funds, as stated earlier, would considerably ease pressure on the trade deficit and minimize the need for the CB to intervene and sell dollars in the money market, he said.

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