Avurudu cash from IMF

By Uditha Jayasinghe

The International Monetary Fund (IMF) yesterday completed the sixth review under the Stand-By Agreement, but urged the Central Bank to watch inflation closely and consider implementing tools to reduce liquidity.IMF Representative Dr. Koshy Mathai yesterday told media that the disbursement of US$ 218.3 million would take place, bringing the total under the arrangement to US$ 1.75 billion.

The fresh infusion ahead of Sinhala-Tamil New Year will boost country’s gross official reserves (without ACU receipts) to over $ 7.2 billion which is equivalent to 6.3 months of imports, Central Bank said.

The release was following the IMF Programme performance being broadly on track. The end-December targets for net domestic financing of the budget and reserve money were met, while the target on net international reserves was missed by less than reported at the time of the Fifth Review. The Government had sought a waiver as they appear to be within reach.

Mathai stressed that Sri Lanka’s requirement for targets was “waived” since the data was not available before the board review and that the organisation was confident of the Government’s credibility in meeting the agreed criteria.

“Since the data would not be available for several more weeks we went ahead with the disbursement since we are confident that the Government will be able to meet our requirements,” he explained, adding that this was simply a technicality.

“There is no indication of problems that would prompt us to believe that the targets will not be met,” he observed, stating that the IMF is so confident of the Government’s commitment to meeting requirements that the quarterly board meetings will henceforth be reduced to semi-annual status.

“This will save everyone a lot of paper work and administration. The review team will continue their quarterly visits and reviews but the IMF Board meeting to disburse the tranche will take place once every six months.”

Under this change the next tranche will be given in August and the final disbursement will happen as a double release in December while the final review will take place early 2012.

Expressing overall confidence in the Sri Lankan economy Dr. Mathai reiterated that Central Bank should continue to watch inflation rates.

 “We expect inflation to increase over the next two months but we don’t advocate immediate tightening of monetary policy because that would slow down the economy. A person affected by high cost of living will feel it even more if he loses his job. Economists believe that a balance must be struck between controlling inflation while not undermining growth.”

Drawing attention to the fuel price increases, the IMF Representative remarked that this was an unavoidable move given the high global prices of food and oil.

Responding to questions on the need to give people relief, he insisted that the Government should consider ways of giving targeted subsidies rather than raising policy rates that would have an adverse impact on growth numbers.

Moreover, he pointed out that the Government’s intention of raising the Ceylon Electricity Board (CEB) and Ceylon Petroleum Corporation (CPC) to breakeven point at the end of the year explained the need to raise fuel prices.

“At the moment the IMF wants the Government to continue strengthening reserves as developing economies elsewhere have stronger reserves. However at the same time we understand that buying foreign exchange also releases excess liquidity into the market therefore the Central bank must look at instruments other than adjusting policy rates to deal with it without constraining growth,” he said, stressing that this would be a feature of the next review discussions. He cautioned against reducing credit recalling that levels are at the same point they were in 2008.

Dr. Mathai was upbeat of meeting fiscal targets despite excess expenses due to floods as it was agreed that Government revenue would be raised by 0.5% this year and 1% in 2012.

Central Bank in a separate statement said IMF funds as well as other receipts on account of workers’ remittances, foreign investments on infrastructure development projects and private sector investments have helped raise the country’s foreign reserves to a comfortable level. Consequently, the gross official reserves (without ACU receipts) now stand at US dollars 7.2 billion, which is equivalent to 6.3 months of imports.

IMF’s Executive Board statement

The Executive Board’s discussion on Sri Lanka, IMF Deputy Managing Director John Lipsky made the following statement along with the decision to release the fresh tranche of support under its support program for Sri Lanka.

“The Sri Lankan economy continues to make progress under the Fund-supported program and overall macroeconomic developments remain favourable. Growth is strong, inflation remains in single digits, and reserves are at a comfortable level. Recent heavy rains and flooding will significantly damage the various crops, as well as rural infrastructure. However, given the size and strength of the economy, the overall impact on output growth is expected to be limited.

“The 2010 Budget deficit target has been met and budget developments so far in 2011 are broadly in line with expectations. The authorities’ plan to handle the flood-related expenses by reallocating and reprioritising expenditure within the existing budget will help maintain the program’s deficit target for 2011.

“Reforming the two State energy enterprises and bringing their combined operating balance to zero this year would ensure the durability of fiscal adjustment. To this end, it will be important to allow adjustment of domestic prices to reflect fluctuations in international fuel prices.

“Steps to expand the liquidity management tools at the central bank’s disposal will help maintain its control over monetary conditions. Going forward, monetary policy will need to be vigilant about the possible second-round effects from higher prices on core inflation and strike the right balance between supporting economic growth and preventing excess liquidity from fuelling inflationary pressures. Allowing sufficient two-way flexibility of the exchange rate will help support the external position and meet the reserves target.

“Financial sector reforms will continue to focus on strengthening the resilience of this sector, and expand the scope of financing options available to the private sector by increasing the depth of the corporate bond market and improving the functioning of the stock market.”