The granting of the third tranche of the International Monetary Fund (IMF) stand-by facility did not come as a surprise to anyone, least of all the officials. It was in line with the optimistic assessments of the economy that one is familiar with in recent months. The IMF tranche was fully worth in gold more than in the dollars it lent. The granting of the third tranche is most important in building international confidence in the economy. Besides this it comes with an invaluable certificate of good economic performance and confidence in the country’s economic prospects. Considering the strong foreign reserve position of the country, the additional credit from the third tranche is not of much consequence. The IMF’s continuation of the stand-by arrangement is however very important.
The International Monetary Fund (IMF) standby facility of SDR 1,653.6 million (about US$ 2,549.6 million) was significant at the time it was granted in 2009. It is equivalent to 400 per cent of Sri Lanka's quota in the IMF. The facility not only averted a foreign exchange and balance of payments crisis but was the foundation for building up international confidence in the post war economy. The third tranche of SDR 137.8 million (about US$ 212.5 million), that was released brings the total disbursements under the standby arrangement to SDR 826.8 million (about US$ 1,274.8 million).
This tranche came as usual with a good certificate about the economy. This is invaluable as it is the foundation for international confidence in the economy. In its press statement the IMF said “Sri Lanka’s performance under the programme has been satisfactory.
Overall economic conditions are improving and the economy is likely to show strong growth this year on the back of improved fundamentals and political stability.” This statement would boost external confidence in the economy that is growing. The IMF statement comes just a few days after several independent international agencies gave good ratings for Sri Lanka. This tranche could result in a further improvement in the international perceptions of the economy.
The World Economic Forum upgraded Sri Lanka’s global competitiveness ranking for 2010-2011 from 79th to 62nd place among 139 nations. Sri Lanka is second only to India (77th) in the South Asian region.
The Forbes Magazine ranked Sri Lanka high at the 83rd place in its list of best countries in the world to do business. This is ahead of many other Asian countries for foreign investment. Sri Lanka ranks above China (90th), Philippines (91st), Russia (97th) and many of the South American nations. Out of the 128 countries listed, Forbes ranks Pakistan at 92nd place while Bangladesh is at 109th and Vietnam at 118th positions. This ranking is on the basis of property rights, technology, corruption, personal freedom, red tape, investor protection and stock market.
Recently Fitch Ratings affirmed Sri Lanka’s long-term foreign and local currency Issuer Default Ratings (IDRs) at 'B+'. It also revised the Outlook to Positive from Stable and affirmed Sri Lanka’s Short-term IDR at 'B' and Country Ceiling at 'B+'. The upward revision reflects the gains from the end of the war in May 2009 and the confidence generated by the granting of the IMF facility and their monitoring of the economy.
Many assessments of countries follow the IMF confidence in economies and an expectation that the economic fundamentals would be put in place by the IMF discipline.
There is a perception that a more disciplined policy framework would be put in place under the Stand-By Arrangement (SBA) with the IMF. However, the country’s progress in improving the economic fundamentals has been weak. The most serious deficiency has been the inability to bring down the fiscal deficit. In spite of the agreement with the IMF to bring down the fiscal deficit to 7 per cent of GDP last year, the budget deficit increased to 9.9 per cent of GDP in 2009. The deficit is expected to be contained at 7.5 per cent this year.
The public debt is at an unacceptable level as high as 86.2 per cent of GDP. Government revenue-to-GDP ratio stood at just 15 per cent inadequate to even meet the debt servicing costs for 2009.
The IMF is as usual hopeful that these fundamental weaknesses would be put right with the next budget for 2011 that will be presented in November.
It is of the view that: “The current favourable environment allows the authorities to focus on addressing the many challenges that remain, particularly in the fiscal and financial sectors. Policies will be geared toward preserving macroeconomic stability, ensuring external competitiveness, facilitating capital market development, and improving the investment climate.” While circumstances may be favourable, the question is whether there is a political resolve to follow prudent and disciplined fiscal policies.
There is much expectation that the next budget would put the country in the right direction towards fiscal consolidation. The IMF says: “Fundamental tax reform, including reform of the investment promotion regime, is central to achieving the government’s budget deficit reduction targets while creating the fiscal space for the much-needed reconstruction and infrastructure investment, as well as social spending. In this regard the 2011 budget will be a key to demonstrate the government’s continued commitment to the programme’s goals.”
The Presidential Commission on Taxation is set to release its final recommendations in November this year. Much is expected from the tax reforms to be proposed by the taxation commission. It appears that the IMF is privy to the recommendations and satisfied with them. New tax measures will be crucial in determining if the authorities can get the public finances on a more sustainable path. It is believed the end of the war should provide flexibility in cutting spending on defence. On the other hand, the increasing debt servicing costs, continuation of wasteful expenditures and the losses in public enterprises that require significant reforms have hardly been attempted. In fact there are indications that losses in public enterprises would increase this year and probably next year.
We may once again have a budget that indicates a lower fiscal deficit that complies with the IMF conditions. The pertinent question is whether these would be achieved. As in the past, the fiscal outcome could be very different to the figures presented in the budget. What does the IMF then do? Find some excuses and get new promises to continue with the next tranches of the stand by facility or discontinue the facility? Time will tell.