IMF wants SOE losses cut, monetary policy on hold

•  Says long-term measures needed to bring CEB out of the red
• Holding on to single digit inflation important
• Calls for greater  FDI focus

By Uditha Jayasinghe

Professing satisfaction on the overall economy, the International Monetary Fund (IMF) yesterday nonetheless called on the Government to stem losses in State-Owned Enterprises (SOEs) and sounded a note of caution on easing monetary policy including interest rates.

Speaking at length to media, IMF Resident Representative Dr. Koshy Mathai stressed on the need to roll back losses on SOEs, especially in the context of the recently-increased electricity tariffs. He also called on the Government to shield the poor and work on long-term solutions to energy needs.

“I think for the existing companies it is very important that electricity costs remain at a reasonable level, that’s why we and the Government realise the importance of doing something to reduce those costs in the long-term through structural reform, bringing in low-cost generation sources.

But of course over the long-term Sri Lanka may have to look at its competitive advantage in exporting certain goods.

IMF...

But that does not in any way take away from the need to improve the utility of companies so that costs can be reduced,” he said in response to questions.

He also noted that inflation rates are not rising at an unduly worrying rate and insisted that controlling cost of living should remain a priority of the Government. Keeping monetary policy on hold and building economic stability on low inflation was earmarked as important by him as was building on the single digit inflation levels maintained by Sri Lanka over the past few years.

Dr. Mathai was also cautious of plans to ease market interest rates, which was mentioned by Central Bank Governor Ajith Nivaard Cabraal earlier this month.

Reuters reported that Sri Lanka’s market interest rates will ease this year as the Central Bank maintains a loose monetary policy stance despite high lending rates and a recent spike in Treasury bill yields. A specific date was not given in the article but it is anticipated that the revision could happen in the middle of the year.

However, Dr. Mathai insisted that the IMF would engage closely with the Government to take restrained action and declined to speculate on how long they would advise maintaining current rates.

Boosting Foreign Direct Investment (FDI) was also highlighted as a need for the economy, though Dr. Mathai remarked that a stronger regulatory framework and stable environment should be the carrot for investors rather than high tax concessions.

“Certainly, boosting FDI is a major priority in terms of the balance of payments, making the numbers add up we would like to have more money coming into this country and not creating debt for the nation and allowing the current account deficit to be financed but at the same time the economy in real terms brings other benefits such as technology transfer and knowhow from other countries – benefits which we would miss out on if FDI does not improve.”

Emphasising that there are no talks for further funding between the Government and the IMF, Dr. Mathai nonetheless agreed that room for further talks existed.

“Those talks didn’t move forward beyond that point,” he said referring to a follow-up program to the US$ 2.6 billion Stand-by Arrangement (SBA) that concluded in 2012, “so right now we are not engaged in an active negotiation phase but we are always open to helping however we can. That option is always there”.