By Chandeepa Wettasinghe
Credit rating agency, Fitch, is expecting Sri Lanka’s foreign reserves to fall in the short-term to be well below the targets of theCentral Bank and the Finance Ministry, raising concerns over the country’s ability to meet the reserves target set by the International Monetary Fund (IMF) loan programme.
“We’re expecting reserves to go up to about US$5.5-6 billion by the year end,” Fitch Asia Pacific Sovereigns Associate Director Sagarika Chandra said.
Sri Lanka’s official reserves stood at US$ 6.75 billion at the end of May, up from US$ 5.05 billion a month earlier, due to the moneys raised through a recent US$ 1.5 billion 10-year sovereign bond, and a 3-year US$450 million syndicated loan, which could be extended up to US$ 1 billion before the end of this year.
The Finance Ministry is expecting reserves to go up to US$ 10 billion according to statements it made in late April, while the Central Bank last month said that the expectation was to build up reserves to approximately US$ 7.5 billion by end-2017.
“US$ 10 billion seems unrealistic at the moment,” Chandra remarked.
She said a continuation of the export growth witnessed in March along with the prudent management of capital outflows and the purchase of reserves under the IMF programme may allow Sri Lanka to push the reserves up to the range of US$ 6-6.5 billion by the end of the year.
The IMF expects reserves to be at US$ 7.12 billion by end-2017 under the latest revised projections last December, after initially projecting the reserves to be US$ 9.37 billion when its US$ 1.5 billion Extended Fund Facility (EFF) to Sri Lanka began in June 2016.
Sri Lanka missed the EFF net reserves target—which excludes illiquid reserve holdings and deferred debt payments—of US$ 5.7 billion in December 2016 by approximately US$ 200 million.
The IMF has now decided to exclude Sri Lanka’s currency swap arrangements with India and China from the net reserves as well.
Although the initial EFF agreement called Sri Lanka to maintain a net reserves stock of US$ 7.04 billion by the end of 2017 as a quantitative target, the revised IMF projections indicate it to settle at around US$ 5.89 billion.
The IMF recently commended Sri Lanka for its commitments to build reserves, after falling short of the December target. A revised staff level agreement was reached last month for some targets including for net reserves.
However, the new target are not yet known, since an IMF statement said the decision to implement the new targets by the IMF would be taken this month subject to completion of a prior action by the authorities.
The US$ 168 million third tranche under the EFF, which was due in April, was delayed due to the country’s inability to meet the net reserves as well as due to delays in passing the new Inland Revenue Bill.