Business Times

CB seeks clarity from IMF on interest rates

By Duruthu Edirimuni Chandrasekera

The Central Bank (CB) has sought clarification on the interest rate of the seventh tranche of the US$ 2.6 billion Standby Arrangement Facility (SBA) of the International Monetary Fund (IMF), according to IMF officials.

IMF Mission Chief Brian Aitken (centre) with two officials just outside the CB building after a briefing. Pic by Nilan Maligaspe

“They (CB) officials sat with our legal team in order to clarify the misunderstanding of the interest rates on our latest SBA drawdown of US$ 800 million,” an IMF official told the Business Times on the sidelines of the IMF SBA review media conference on Friday. He added that earlier there was a slight misunderstanding on whether the government would only have to pay a higher interest rate of 3.1 % for the SBA when it exceeds the 300% of the country's quota when drawing this latest tranche or whether this rate will be slapped on the entire amount (drawn so far) if this tranche is drawn. He explained that the IMF has made 400% available instead of the usual 300% per country and that Sri Lanka will have to pay 3.1% only on the balance US$ 800 million.

"These points were clarified by the CB with our legal team," he added. At the media conference, IMF mission chief Brian Aitken noted that there was a rapid credit growth towards the end of last year. He said that it cannot go on (as it did in the last quarter of 2011).

“We had hoped to see a slowdown in credit growth and a narrowing of the trade deficit. It has not happened. The main mission of this review mission was to discuss this credit growth and also the widening of the trade deficit.

The widening in imports came from a post-war boost in confidence and consumer and investment goods increasingly rapidly. The challenge comes out as a result of the economic success,” he added.
He welcomed CB’s move to increase policy rates by 50 basis points and pushing the Repurchase and Reverse Repurchase rates to 7.5% and 9% and said that the government needs to further reduce the deficit and bring more efforts to tighten the credit growth. "There was a strong policy response and we saw a qualitative shift in the policy stance,” he said. Sri Lanka had US$ 6 billion reserves as at end last year.

He added that currency devaluation last November was a good first step. “We feel a more flexible exchange rate should be part of the package." He added that the policy actions of the government are sufficient to turn around the current account deficit.

When queried on whether the government will draw down the US$ 800 million, he noted, “It’s up to the government to decide whether they'll draw it or not. It’s not our decision.”

This is the final review mission of the Fund’s $2.6 billion credit facility, with the team due to report back to the board of directors on their findings. Central Bank Governor Ajith Nivard Cabraal has said it is unlikely that Sri Lanka will draw the balance $800 million as it would be more than double the present rate on the already-drawn $1.6 billion.

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