Business Times

IMF says negotiations continue for next tranche under SBA

By Bandula Sirimanna

The International Monetary Fund (IMF) is continuing its discussions with the Sri Lankan government on the disbursement of the 8th tranche of $2.6 billion IMF standby facility, IMF Country Representative Koshy Mathai told a gathering of bankers, professionals and leading businessmen at HSBC organized Power Breakfast meeting in Colombo Hilton this week.

He said that no time table has been fixed for the consideration of the 7th review to arrive at a decision on the disbursement of the 8th tranche. The IMF has already disbursed $1.8 billion and the balance $800 million is to be given out in two tranches of $ 400 million each, Dr Mathai said. The IMF will continue its assessment of Sri Lankan policy actions and resume discussions at the annual IMF meetings scheduled to be held in Washington soon.

He reiterated the IMF's stand on limited currency market intervention and more exchange rate flexibility based on market pressures in Sri Lanka. The IMF programme is formally scheduled to end in March 2012 with foreign reserves rising to a high of $7 billion dollars (mid-2011) from a low of $1.4 billion at the height of a balance of payments crisis in mid-2009. He said the economy has stabilized now with inflation around 7.5 % compared to 20 % in 2008 and growth strong at around 8 %.

The IMF's last review team decided to end quarterly reviews and move to 6-monthly reviews for the last stretch with the economy generally coasting along smoothly with the budget deficit set to fall to around 7 % of gross domestic product this year. "We have not had any recent discussions about moving to a precautionary arrangement, but it is up to the authorities to choose whether or not to draw a disbursement, and we're always happy to engage in whatever way they find most helpful," Dr Mathai said.

Sri Lanka's foreign reserves (along with about $1.5 billion of IMF loans) are now twice the domestic money supply, roughly indicating that the Central Bank has enough dollar reserves to meet its Rupee obligations twice over.

"Let me then say a couple of words about the general situation. As you know, there are always risks when one looks at an economy, and that's true here as well, but all in all we're pretty happy with what we are seeing in the Sri Lankan economy. The external position is much healthier than it used to be a couple of years ago. Reserves are up substantially, and yes, there are risks there; imports are rising; oil prices are rising; but at the same time we continue to predict that the balance of payments overall will be in surplus this year and that the reserve position will be all right," he said.

"The exchange rate has been stable. In fact, over the last few months we've seen some appreciation of the exchange rate, and we've been happy to see some movement, but as we've emphasized earlier , we would like to see movement in both directions-two-way flexibility of the exchange rate, in order to ensure that the competiveness of the economy is maintained over the medium term. Overall the external sector is certainly much healthier than it was before," he added.

"A second point is that inflation and monetary conditions are better and easier than they were before. Inflation of course has ticked up in recent months, and a large part of that as far as we can tell is supply shocks-international food prices rising. The IMF is optimistic of Sri Lanka's economic prospects and the country has taken several meaningful steps to thrust economic growth," he said.

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