The rupee tumbled this week against the US dollar, reaching Rs. 116 after the Central Bank withdrew from the market coinciding with the visit of an IMF team negotiating a mega loan for Sri Lanka, banking sources said.
They said the dollar gained since the Central Bank (CB) did not pump in dollars as it usually did when the rupee fell sharply against the US currency, fuelling speculation that the CB was already enforcing some of the measures the IMF would like to see implemented ahead of finalising the $1.9 billion standby facility.
The IMF delegation left on Wednesday after an 11-day visit aimed at reviewing the Central Bank’s request for balance of payments support.
A flexible exchange rate policy -- reduction of imports and increasing export revenues to ensure a surplus (of dollars) -- is what the IMF would ask the government to do in the event of the $1.9 billion being approved, which many economists and analysts here say is mostly likely to happen.
The team comprised Kalpana Kochhar, Deputy Director, Asia desk and Special Representative of the Director, Asia; Brian Aitken (Head of Mission); Ebrima Fall; Magnus Saxegaard; Eteri Kvintradze and Shanaka Peiris, (a Sri Lankan economist working in the
IMF and the son of well-known medical practitioner, Dr. J.B. Peiris).
Economists said the team met CB and Finance Ministry officials and also had a meeting with Opposition leader Ranil Wickremesinghe on Saturday, March 28.
However unlike the normal Article IV consultations that the IMF regularly has with member countries where the teams meet a cross-section of people, including economists, university academia and the business community, this time no such discussions were held with Sri Lanka's private sector, The Sunday Times learns. About a month ago, an IMF fact-finding mission met business leaders in Colombo, among others.
In the Colombo money markets, the dollar rose to more than Rs 116 (per $1) and was holding at these levels for several days in the past week unlike in the past where the CB would intervene whenever it reached Rs 114 and pump more money in to bring it down. "The CB's action could be seen as a gesture to the IMF that the authorities will not unnecessarily intervene in the market and allow the rupee to float," one banker said.
The visiting team is expected to submit a report to the IMF board by mid-April and when a board decision is made and announced, the first tranche will be received on the same day itself.
"There is no doubt the IMF will lend this money. It has a moral duty to help countries in need," said Dr Saman Kelegama, Executive Director of Sri Lanka's Institute of Policy Studies. He said for the past three years the IMF has been dormant and had a lot of reserves. "The current crisis (across the world) gives it space to assert itself again."
Thursday's decision by the leaders of G20 countries meeting in London to provide $ 750 billion dollars to the IMF to help countries in 'crisis' gives an added impetus to an institution to spring back into the limelight, economists said, adding that future lending to 'needy' countries will, however, be sans most of the stringent conditions the fund normally has.
Another decision at the London Summit is a $250 billion increase in Special Drawing Rights (SDRs) to the IMF. This will allow countries to tap this money without having to accept changes to economic policies often demanded as a condition of loans, according to news agency reports said.
Today, the Central Bank in a newspaper advertisement says that resident Sri Lankans who earn foreign cash through professional services delivered abroad will be allowed tax-free remittances for a two-year period from April 1, 2009 to March 31, 2011. The intention is to attract more remittances to the country through this source, CB officials said. An earlier effort to attract Sri Lankans to invest in Diaspora bonds to bolster the country's sagging foreign exchange reserves, down to a few weeks worth of imports, did not work as expected. This led to the request for an IMF facility.
Banking sources say that though standby arrangements are strictly to the Central Bank for balance of payments purposes, in most cases this money is used for government spending.
In the meantime, the Bank of Ceylon cut its lending rates by 2% and the People's Bank by 3% mid-week, signalling a possible rush by other banks to bring down interest rates after the Central Bank said inflation had fallen sharply in March.
The private sector has been complaining of too-high interest rates for a long time, saying it has affected investment and day-to-day costs.
However falling interest rates would now reciprocally bring down interest rates on deposits, which to many (particularly pensioners) is the only means of a monthly income. "It's a real dilemma: High interest affects the business and low interest affects the common man," said an economist, adding that more desperate people may revert to the risky, unregulated finance companies for a higher return.
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