New IMF facility crucial for reforms: economist

„„By Chandeepa Wettasinghe A new standby facility from the International Monetary Fund (IMF) will be key to pushing ahead with the reforms required to develop Sri Lanka, a leading economist told Mirror Business. “We will need the lifeline from the IMF. Then we can push for reforms. We need to transition smoothly from a debt-fuelled economy to a sustainable growth model,” Australian National University Economics Professor Prema-Chandra Athukorale said. Prof. Athukorale said that since the fiscal deficit has now deteriorated to a point of a balance of payment crisis, fuelled mainly by the past regime’s lack of fiscal and monetary policy discipline, and the debtfuelled growth, Sri Lanka would require a bailout. “We have seen the increasing imports of vehicles etc.

People are anticipating a crisis and are creating product reserves,” he said, giving an example of the current vulnerable period creating headaches for the new regime. He noted that the government c a n n o t o p t f o r e i t h e r t h e traditional expansionary or contractionary monetary policies, due to the deteriorating balance of payment situation.

“Sri Lanka is caught between a rock and a hard place. We can’t expand because of a possible crisis situation, and the Central Bank needs to reduce interest rates, not increase,” Prof. Athukorale said. He said that if breathing room is created, one of the main reforms that can be brought on is tariff reforms, where customs tariffs are reduced to further promote international trade through Sri Lanka. “Increasing tariffs will not increase revenue, and it could be counterproductive. We need uniform tariffs. Less tariffs will also improve customs procedures with less people trying to go around them,” he said. Pic by Pradeep Dilruckshana

Prof. Athukorale added that income taxes must also be refined from the policies implemented through the recent budget. “Increasing the income tax threshold was good, because we need to think about the majority of the public, and it reduces income inequality. But, reducing the tax rates was silly. I would also consider a wealth tax. It could be difficult to implement, but it would be popular among the public,” he said. He noted that though the political situation may not be right for a complete overhaul of the labour laws, human capital development should become a priority, with a focus on mid-level skills creation, instead of high-end skills like engineers who are in oversupply.

“We also need a giant investment promotion. There are many local companies that produce small components for global brands like Toyota and Boeing. We need to make them known and bring in investments,” he said. He added that Sri Lanka must also closely integrate the North and the East into the country’s economy by creating seafood hubs.

However, Prof. Athukorale said that the recent Sri Lanka Economic Summit and its takeaways have created a diversion from the reform path Sri Lanka should be taking. Meanwhile, he noted that a new IMF stand-by agreement would reduce the interest rates and appreciate the rupee, as seen when the previous facility was taken in 2009 as well. “If the IMF gives money, we can go on with a conventional monetary policy, because it will reduce the risk premium for Sri Lanka. We can also float the currency and build confidence,” he said. However, he said that exchange rates must be gradually depreciated

when such bubbles are bursting, which was not practised by the former regime. He added that the current exchange rate weakness may be interpreted by investors as a further budgetary weakness, which may lead to further outflows of foreign funds. However, he said that a respite came from low oil prices and Sri Lanka’s main markets remaining in Europe and the US instead of in China. The messages from the government on the IMF package have been inconsistent. Prime Minister Ranil Wickremesinghe has been saying since last year that Sri Lanka would be applying for an IMF bailout. The IMF recently said that the government hadn’t made a formal request for a package so far. But Mirror Business learns that the government has expressed its interest to the IMF for a new facility.