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Three-year IMF programme to reform Lankan economy

12 April 2016 12:00 am - 0     - {{hitsCtrl.values.hits}}

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The International Monetary Fund (IMF) staff team in town yesterday said “significant progress” towards a staff-level agreement with the Lankan government for a three-year fund facility has been made but the discussions would continue in Washington D.C. during the next two weeks to reach a conclusion.
The much-expected bailout package will take the form of a 36-month Extended Fund Facility (EFF), which is different from the US $ 2.6 billion Stand-by-Arrangement facility entered into in 2009 when the country was running into a severe balance of payment (BoP) crisis, soon after the conflict ended.   


The staff team, headed by Todd Schneider, was in Colombo from March 31 to April 11 for its annual Article IV consultation discussions, but did not disclose the quantum of the facility and the timelines of disbursement.

The mission said the EFF would be subject to approval by the IMF Management and Executive Board.  Irrespective of the size of the facility, economists say the IMF programme will place a badge of confidence on to the otherwise ailing economy, from which the investors are exiting.
Sri Lanka is known to practice loose monetary and fiscal policies only to see its currency being extensively defended by heavy selling of its borrowed foreign reserves, driving the country into repeated BoP crises and then wait for the IMF to bail her out – a common cycle of boom and bust.
The IMF programme, as widely expected, has listed down a slew of reforms to discipline the Lankan economy, which is running a very high budget deficit in 2016 amid thin revenue streams.


“The key objectives underlying the reform agenda include: (i) improving revenue administration and tax policy; (ii) strengthening public financial management; (iii) state enterprise reforms and iv) structural reforms to enable a more outward-looking economy, deepen foreign exchange markets and strengthen financial sector supervision,” Schneider said concluding his visit.

Sri Lanka has the bad habit of inviting the IMF to discipline its economy when the policymakers themselves could carry out the same reforms. But the country’s political masters delay the critical reforms to stay popular among the masses but later pay a huge price with the poor masses having to bear the cost.  
Despite the government’s ambitious growth targets, the IMF projects the country’s gross domestic product to remain around 5 percent, while the inflation in the low single digits in 2016.
“Over the medium term, there is potential for growth to rise closer to Sri Lanka’s estimated potential output level, but prospects will hinge on a policy upgrade in the near term and removing bottlenecks to trade and investment,” Schneider remarked.

 

Wants CB to be ready for further monetary tightening 

The multilateral lender welcomed the recent tightening measures by the Central Bank and said the monetary authority should be prepared to tighten the policies further if those policy measures fail to yield the desired results.  


The IMF said this considering Sri Lanka’s long lag in monetary policy transmission into the real economy as such could fail to slow the continued increase in core-inflation and private credit growth.
Sri Lanka ran a loose monetary policy from December 2012 through December 2015, heating up its core inflation to 5.7 percent in February 2016 and pushing the private credit to an all-time high of Rs.691 billion in 2015, 
before being forced to adopt a tightened monetary policy stance.


With the tightening bias now in motion and the higher interest rates, the IMF cautioned of possible deterioration in banks’ asset quality and urged the relevant parties to remain vigilant to the risk of a potential rise in non-performing loans.
However, the IMF said Sri Lanka’s financial system is well capitalized.

before being forced to adopt a tightened monetary policy stance .With the tightening bias now in motion and the higher interest rates, the IMF cautioned of possible deterioration in banks’ asset quality and urged the relevant parties to remain vigilant to the risk of a potential rise in non-performing loans.
However, the IMF said Sri Lanka’s financial system is well capitalized.

 

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