Business Times

IMF loan suspension won’t affect Lankan finances

The IMF move to suspend the third tranche of a $2.6 billion credit line till the April poll and economic policy direction by a ‘new’ regime follows some concern that the government is not sincere about keeping to targets, economists said.

However its delay won’t have any impact on government finances or foreign reserves. A senior economist, working in the private sector who declined to be named, told the Business Times that while the decision is unlikely to affect Sri Lanka, IMF officials have been concerned over the ‘lack of genuineness’ towards curbing spending.

“There was a level of sympathy and genuine concern towards Sri Lanka last year (in terms of the targets) because the country had to develop the North and the East in addition to lower revenue owing to the global financial crisis, and that’s why the second tranche was approved (in September) even though some budget targets were not achieved. While there is some understanding that targets are unachievable due to vote-catching election spending, the IMF is concerned that a more sincere effort is not being made to reduce costs,” she said.

Sirimal Abeyratne, senior economist at the University of Colombo, also agrees that Sri Lanka’s foreign reserves are strong and the government actually doesn’t need the money (right now). “However it would be foolish to jeopardize the programme which brings a lot of benefits to Sri Lanka in terms of keeping to targets and reducing spending which has sharply risen,” Dr Abeyratne said.

The IMF mission visiting Colombo last week told reporters that the third disbursement of around $320 million (which should have been due in December/January) will be assessed after another mission visit and after the budget is presented, at the same time when the new government present’s its economic direction.

The team said spending had exceeded targets due to high infrastructure costs and lower revenue.
Asked to comment, Central Bank Governor Ajith Nivard Cabraal said there was ‘absolutely” no risk to the economy even if there is a delay in the IMF money. “The level of reserves is such that we are comfortable to face any adversity and hence there is no cause for any concern,” he said, adding: “the IMF statement is clear – that they are, by and large, satisfied with the (credit-line) programme progress.”

However development economist Muttukrisna Saravananthan believes that the government is also keen to continue the programme because it boosts investor confidence in the economy. “Although the money may not be needed, it’s a good confidence boost – like a PR exercise -- for foreign investors to know that the IMF is here.” he added.

In some government circles, the prospect of discontinuing with the IMF programme since Sri Lanka’s foreign reserves position is comfortable and maintaining budget deficit and monetary targets could get difficult, has come up for discussion, but no decisions have been made.

Dr Abeyratne said it would be unwise to discontinue such a programme even if the reserves’ position is okay because it’s good to have spending targets to ensure there are limits.

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