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Tuesday, 31 January 2012 00:05 - - {{hitsCtrl.values.hits}}
For few days, the not so ‘whole truth’ was out in the market, but perhaps due to the Opposition’s fire and realising the blunder and implications, a better-late-than-never conspicuous correction termed “clarification” has finally saved the face of Central Bank.
Governor Nivard Cabraal had been quoted during the past few days to the effect that Sri Lanka will have to pay a relatively high 3.1% interest on the full amount of $ 2.6 billion if the country were to absorb the remaining tranches.
This was confirmed further by Cabraal in a Reuters interview yesterday. “If we do not draw any further money, we will have to pay only a 1.1 per cent interest rate for the entire loan. But otherwise for the entire loan of $ 2.6 billion, we will have to pay 3.1 per cent,” Central bank Governor Ajith Nivard Cabraal had told Reuters in an interview.
“With the US Federal Reserve saying that they are going to hold rates until 2014, which are almost zero, that puts a lot of pressure on someone borrowing at three per cent. That is why we thought it is better for us to not to take any money.”
In both instances the 3.1% on the entire loan was mentioned in addition to stressing that borrowing at 3% would bring lot of pressure.
Yesterday afternoon the Daily FT received a call from UNP MP and its Chief Spokesman on the economy Dr. Harsha de Silva, who has been a longstanding vocal critic of Cabraal, stating that Central Bank Chief was spreading “absolute lies” unbecoming of a person enjoying the stature of head of the monetary authority.
De Silva said that as per the IMF rules, the additional interest wasn’t 3.1% and nor would the higher amount become applicable to the full Stand-by Arrangement (SBA) figure of $ 2.6 billion.
“A Central Bank Governor should know the facts before commenting and a person holding that high post must not lie as well. This puts the entire credibility of the Central Bank at stake,” the UNP MP alleged. He said that Cabraal was trying to give a complete false picture with his wrong comments.
Having verified the facts personally, the UNP MP had also inquired about the actual position with regard to the applicable interest rate and on what part of the loan program from the IMF officials as well.
Perhaps having got wind of UNP criticism or out of self realisation, the Central Bank last evening issued a short statement clarifying media reports on the IMF-SBA program. The statement, however, didn’t refer to comments made to media by Governor Cabraal or whether he had been misquoted or not, or even whether the CB Chief had made incorrect remarks.
Via the statement titled “Clarification on the Recent Media Reports on IMF-SBA Program,” the Central Bank said: “The IMF approved a Stand-By Arrangement facility (SBA) of SDR 1.65 billion (equivalent to US dollars 2.6 billion) in 2009, which is equivalent to 400% of the country’s current quota with the IMF. So far, Sri Lanka has received seven tranches amounting to US dollars 1.7 billion under the SBA and this is still lower than 300% of the quota. The applicable interest rate for the loan is SDR rate (SDR rate is calculated every week and published on IMF website, which is currently 0.1%) plus a fixed margin of 1% p.a. for disbursements up to 300% of the quota. Therefore, the interest charge for the present outstanding of US dollars 1.7 billion is 1.1% p.a. However, if the disbursements exceed 300% of the quota, a surcharge of 2% will be added on top of the present interest rate for the credit outstanding above 300%.”
Dr. de Silva after reading the statement maintained that though the clarification may help, the CB Chief had caused enough damage to the market’s and Government’s confidence with his previous statements.
The UNP MP also said that though the CB Chief was warning about high interest rates (3.1%), the Government would not be able to raise any fresh funds at much cheaper rate via its borrowing program at commercial rates. This, Dr de Silva charged, shows incompetence.
The UNP MP said it was advisable for the Government proceed with the IMF program as it could boost its sagging reserves with the infusion of $ 800 million at 3.1% interest rate. He said that a major difference of opinion was hanging over the future of the final tranche.
The CB on behalf of the Government last tapped the international markets in July with a $ 1 billion worth 10-year global bond at a fixed-rate yield of 6.25%, equivalent to a spread of +332.2 bps over the 10-year US Treasury. This was after the issue drew a demand worth $ 7.5 billion, considered a major achievement.
Here is the full text of the original Reuters report:
Sri Lanka, which is locked in a row with the International Monetary Fund over its exchange rate policy, will not draw the remaining $ 800 million of a $ 2.6 billion loan from the global lender due to the high interest rate, the Governor of the Central Bank said on Monday.
The country has already received $ 1.8 billion of the loan in seven tranches since July 2009, but the IMF has withheld the eighth payment since September after the Central Bank failed to allow flexibility in the rupee exchange rate.
“If we do not draw any further money we will have to pay only a 1.1 per cent interest rate for the entire loan. But otherwise for the entire loan of $ 2.6 billion, we will have to pay 3.1 per cent,” Central Bank Governor Ajith Nivard Cabraal told Reuters in an interview.
“With the US Federal Reserve saying that they are going to hold rates until 2014, which are almost zero, that puts a lot of pressure on someone borrowing at three per cent. That is why we thought it is better for us to not to take any money.”
Given the Central Bank’s failure to allow flexible exchange rate, markets had been expecting a ‘make or break’ decision either from the IMF or Central Bank on the loan, which was extended by another year with a waiver in 2011.
Sources close to the IMF have told Reuters that a flexible exchange rate would be the key to move forward with the loan.
The loan programme and the end of a 25-year civil war in May 2009 have helped revive foreign investor confidence in the $ 59 billion economy.
The Central Bank has spent more than $ 1.07 billion keeping the exchange rate steady since a three percent devaluation on 21 November, after spending a net $ 1.61 billion from July-October to keep depreciation at bay.
That has cost it a third of its record reserve total of $ 8.1 billion held at end-July.
The IMF loan was meant purely to boost the country’s reserves, and Central Bank officials say there will not be any fiscal adjustments required due to the decision.
Sri Lanka’s reserves were at $ 6 billion by end-2011.
An IMF mission is in talks with Sri Lankan authorities to assess the country’s economic performance under the loan.
“I can tell you, in all the meetings, there was not even one discussion took place on that,” Cabraal told, referring to the exchange rate policy.
The Central Bank has refused to stop defending the currency, arguing it has the reserves to pay for it in anticipation of inflows in the first quarter that will stem depreciation pressure.
Sri Lanka’s ability to meet fiscal and reform targets spelled out under the loan programme and its post-war economic performance have been key gauges for global credit rating agencies, and economists expect any negative comments from the IMF could have an adverse impact on the country’s borrowing costs.
Sri Lanka’s IMF Country Representative Koshy Mathai said it was up to Colombo to decide if it wanted to draw the remaining money under the programme.
“We are happy to be involved in whatever way the Sri Lankan Government and Central Bank find most useful,” Mathai told Reuters.
