Another mission from the International Monetary Board (IMF) is due in December for a fuller review of Sri Lanka’s economic performance, according to Central Bank Governor Ajit Nivard Cabraal.
He was responding to growing concern over the last IMF mission statement, after a visit last month, over the need for a more flexible exchange rate, and resulting in an unfinished review – which was unusual.
“It was I in fact that suggested that they do a fuller review later and come back in December (as all the figures were not available at that time). We will show the results of our policies (actions) then,” he told the Business Times.
In its statement, the fund said it was concerned about foreign exchange sales and urged the Central Bank to limit its intervention and allow more exchange rate flexibility.
But Central Bank officials argue, that these concerns are based on the Bank’s dollar sales in July and August when huge import bills particularly owing to high oil prices led to a sharp draw in dollars, and not on latest data.
Explaining Sri Lanka’s agreement (Stand-by Arrangement) with the IMF, the Governor said that the agreement ends on 31st December 2011 and from January onwards, “we have to maintain price stability and economic stability (targets).”
He said a flexible exchange rate (as suggested) could trigger inflation. “We cannot have 14% inflation after the IMF leaves us in January. We think our policy is the best way forward. We have maintained a consistent path of growth and not wavered from that strategy. There may be minor problems but, by and large we have stuck to the strategy. We are very clear in our position,” he said.
As per situation regarding foreign reserves, the Governor said the aim of the IMF assistance was to raise the reserves to $3.5-4 billion from a lower figure at a time when Sri Lanka’s reserves were low. Reserves have now soared owing to a combination of remittances, IMF inflows and bond issues.
“There is some $100-120 million due from the IMF (as the last few tranches). But we actually don’t need this money anymore as our reserves are strong,” he added.
Bank dealers and money market specialists have also endorsed the Bank’s policy of limited intervention in the markets to ensure an foreign exchange equilibrium between imports and exports.
Earlier in the week, the Bank said the total external reserves rose to $9.4 billion by end July 2011 due to the improved macroeconomic environment and several initiatives to attract foreign inflows contributing towards strengthening the country’s external reserve position.
It said average crude oil prices gained by 36.6 % to $107.95 per barrel in the first seven months of 2011 resulting in the petroleum bill rising by 39.4 % to $2.5 billion.
A relaxation of exchange control rules by the Bank in November 2010 had facilitated foreign exchange transactions and business activities during the past few months. The Bank said this has enabled corporates to borrow from foreign sources resulted in 14 private companies obtaining foreign loans totalling $197.1 million by mid-September 201, while permission granted to foreign companies to open places of business resulted in 20 new foreign companies commencing business in Sri Lanka this year.