Reform or relapse, IMF warns SL with $ 1.5 b cash

Monday, 6 June 2016 00:00 -     - {{hitsCtrl.values.hits}}

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Urgent reforms for revival of an economy showing signs of strain is the emphatic message from the International Monetary Fund (IMF) for Sri Lanka with the former’s approval of $ 1.5 billion cash support under a three year program. 

The IMF’s Executive Board on Saturday approved a 36-month extended arrangement under the Extended Fund Facility (EFF) with Sri Lanka for an amount equivalent to SDR 1.1 billion (about US$1.5 billion, or 185% of quota) to support the country’s economic reform agenda.

The decision by the Government to seek an EFF from the IMF stemmed from both external and domestic developments.

The IMF said the arrangement aims to meet balance of payments needs arising from a deteriorating external environment and pressures that may persist until macroeconomic policies can be adjusted. It is also expected to catalyze an additional US$650 million in other multilateral and bilateral loans, bringing total support to about $2.2 billion (over and above existing financing arrangements).

The IMF Executive Board’s decision will enable an immediate disbursement of SDR 119.894 million (about US$ 168.1 million), and the remainder will be available in 6 instalments subject to quarterly reviews.

The Central Bank said the interest rate applicable on the EFF, the basic rate of charge is equivalent to the SDR interest rate, which currently stands at 0.05% per annum, plus 100 basis points. Hence, the interest rate of the EFF facility is significantly lower than the prevailing market rates.

Following the Executive Board discussion on Sri Lanka, IMF Deputy Managing Director and Acting Chair Min Zhu  said:  “Despite positive growth momentum, Sri Lanka’s economy is beginning to show signs of strain from an increasingly difficult external environment and challenging policy adjustments. The new government’s economic agenda, supported by the Extended Fund Facility, provides an important opportunity to re-set macroeconomic policies, address key vulnerabilities, boost reserves, and support stability and resilience.”

“A return to fiscal consolidation, targeting a reduction in the overall fiscal deficit to 3.5% of GDP by 2020, is the linchpin of the reform program. Rebuilding tax revenues through a comprehensive reform of both tax policy and administration will be key in this regard, supplemented by steps toward more effective control over expenditures and putting state enterprise operations on a more commercial footing.

“Medium-term growth prospects also need to be supported through a greater role for market forces and a decisive shift toward an outward orientation. A clear commitment to exchange rate flexibility will enable adjustment to a shifting external environment while allowing the central bank to rebuild foreign exchange reserves and focus more closely on its key mandate of price stability. The economic program also supports the government’s objective of boosting competitiveness and greater integration with regional and global markets through comprehensive trade reform and improvements to the investment environment. Steadfast implementation of these reforms should strengthen Sri Lanka’s ability to attract investment, improve prospects for sustained medium-term growth, and reduce fiscal risks.”

In response to the request for an EFF by the Sri Lankan authorities, a team of IMF officials visited Sri Lanka in March/April 2016, and conducted several rounds of discussions with the Sri Lankan authorities. The discussions with the senior staff of the IMF were continued by the Sri Lankan delegation to the IMF during its Annual Meetings in April 2016. Subsequent to the successful completion of technical level negotiations, meeting of the recommended prior actions by the government, and the signing of the Letter of Intent (LOI) by Sri Lankan authorities in May 2016, the EFF was approved by the Executive Board of the IMF on 03 June 2016.

Program Summary

The proposed new IMF-supported program aims to provide a policy anchor for macroeconomic stability and structural reforms, while strengthening external resiliency in a challenging global environment.

The key objectives of the program relate to fiscal policy and the balance of payments, and measures to: 

    (a) implement a structural increase in revenues, 

facilitating a reduction in the fiscal deficit; 

(b) reverse the decline in central bank foreign exchange reserves; 

(c) reduce public debt relative to GDP and lower 

Sri Lanka’s risk of debt distress; and 

(d) enhance public financial management and improve the operations of state owned enterprises. 

The program also aims to transition toward inflation targeting with a flexible exchange rate regime and to promote sustainable and inclusive economic growth.

To achieve these objectives, the program would envisage implementation of a set of reforms under six pillars:

(i) Fiscal consolidation;

(ii) Revenue mobilisation;

(iii) Public financial management reform;

(iv) State enterprise reform;

(v) Transition to flexible inflation targeting under a flexible exchange rate regime; and

(vi) Reforms in the trade and investment regime.

 

 

 

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