The IMF will monitor foreign commercial borrowings by the government and also repayments of foreign debts, under its US$ 2.6 billion Stand by Arrangement. “A continuous performance criterion applies to contracting and guaranteeing of medium and long-term non-concessional external debt by the government,” said the Technical MOU with the IMF, released by the Central Bank this week.
However, ‘disputed’ external debts will not be counted against the government, as debts in arrears. “However, overdue debt and debt service obligations that are in dispute will not be considered as external payments arrears for the purposes of program monitoring,” said the MOU.
This seems to provide some breathing space for the government on the disputed petroleum hedging deal. The Central Bank declared the oil hedging deal, between the Ceylon Petroleum Corporation, and five banks, as ‘tainted’ and payments to the banks, adding up to some US$ 800 million, were stopped. The case is still under arbitration. The IMF has also put controls on the government’s domestic borrowings and the Finance Ministry and the Central Bank will have to regularly report to the IMF.
Economists say controls on government borrowing are a good thing but also say the targets are going to be tough for the government to meet, because controls on government expenses are highly politically sensitive. The government will also have to meet masive, new expenses for war reconstruction of the North and East.
“These targets are going to be very difficult for the government to meet, because more than anything, containing the budget deficit is a politically sensitive issue,” said Senior Economics Lecturer at the University of Colombo, Dr Sirimal Abeyratne.
Sri Lankan governments have traditionally overshot budgeted expenditure and under performed on revenue collection, resulting in both local and foreign borrowings to bridge the budget deficit. But immediate reforms will be needed under the IMF programme. “The government cannot cut spending for the North and East. So they will have to immediately start targeting wasteful and unnecessary expenses.
For instance, they can target welfare programmes better and get State Owned Enterprises to perform better. They will also have to widen the tax base to increase revenues as soon as possible,” said Dr Abeyratne.