The Sri Lankan government has decided to request the completion of t he eighth review of the ongoing US $ 2.6 billion IMF (International Monetary Fund) Stand-by facility in order to draw the last tranche of US $ 400 million, though Central Bank Governor had earlier said they country would not go for it.
According to t he letter signed by Finance and Planning Deputy Minister Gitanjana Gunawardena and Central Bank Governor Ajith Nivaard Cabraal, the government has requested the establishment of endJune 2012 performance criteria and indicative targets with respect to the completion of the eighth and final review under the arrangement to be scheduled for July 16 as discussed in the Technical Memorandum of Understanding.
The letter further assured the IMF that the government expects to start rebuilding its net international reserves and aim, at least, to reverse the recent decline in net international reserves completely by end-2012.
“We are confident that the package of measures taken will reduce the external current account deficit towards a sustainable level by the end of 2012,” the letter noted referring to the numerous corrective measures implemented by the government early this year.
“The government is firmly committed to a flexible monetary and exchange rate policy under which it will take whatever necessary steps that are needed to achieve its objectives,” it added.
However the IMF has pointed out that there are significant challenges remaining in the implementation of this package of remedial measures taken by the government in the coming months.
According to the IMF, these relate mainly to the conduct of monetary and exchange rate policy.
“With regard to exchange rate policy, it is vital that the government consolidates the transition to a genuinely flexible exchange rate system,” the IMF stated in a recent document that was released on the eve of the annual meetings of the IMF and World Bank currently underway in Washington.
It went on to state that the government will need to develop an operational framework to implement its instruction to banks to reduce overall credit growth in 2012 and with a more flexible exchange rate regime, monetary policy will need to be transformed so that interest rates play a bigger role in macroeconomic management.
“Some time is needed to assess the initial impact of the government’s policy package, but a further increase in policy rate will likely soon be needed to rein in credit growth, respond to potential inflationary pressures, and support the exchange rate while the central bank is phasing out its intervention in the foreign exchange market,” the IMF document said.
IMF explained that the government will also need to monitor potential vulnerabilities in the banking and corporate sector during this transition.
However, according to the document, the preliminary indications are that the vulnerabilities to interest rate and exchange rate shocks are relatively contained.
“These issues will be explored further in the forthcoming FSAP update mission planned for July,” it further added.