With no signs of a decision on the IMF loan, the Governor of the Central Bank has once again reiterated that it is less important now as the reserves have improved.
Governor Cabral has said "Things are looking good after the war. The urgency for an IMF loan is not there anymore," He pointed out "We have over 1.6 billion dollars in reserves, enough to pay for over two months of imports. And the figures are steadily climbing." According to Central Bank figures, foreign reserves had increased to 1.3 billion dollars by the end of April.
It has probably increased further owing to the inflow of capital that has resulted in a balance of payments surplus. Governor Cabraal said inflows had come from higher remittances, donor funds and foreign investors buying rupee-denominated treasury bills and bonds. The Central Bank has also raised cash by selling dollar debt. These developments have also meant that the exchange rate has steadied around Rs. 114 -115 per US $.
Nevertheless, the Governor was cautious in his remarks maintaining the position that the IMF loan could do the economy good in several ways. He said some investors would still be more comfortable with an IMF loan. This is very correct as investors and even foreign governments take the decision of the IMF to lend to countries as a good sign of their economic situation. This may be even more important with respect to foreign borrowing from commercial sources. Even though the country has not defaulted in any foreign loan repayment the IMF loan would add fresh credibility. As the Governor said quite correctly, “If the IMF funds come, it will give us a comfortable buffer stock. I hope we get it. But we are otherwise in a comfortable position right now" The IMF loan would improve our credit rating.
The IMF statement last week was non-committal. It merely said the loan was still pending and that it was before the executive board. It had not even set a date to consider the application. It appears that discussions are continuing ad infinitum.
Reading between the lines with some information gleaned from sources in Washington, there is likely to be a delay owing to the political dust that was provoked at the time of the end of the war and an impending loan from US. A more favourable stance by the US government to the Sri Lankan situation would have to precede the granting of the loan.
The Governor has remarked that the urgency of the loan is less but even its delayed granting would be more than useful. This indeed is the correct position that we should adopt. We should not be too complacent about the foreign reserve position of the country. Although we are experiencing a surplus in the balance of payments currently, this could easily change.
The global conditions are not at all favourable to the country’s trade and payments position. With the recession continuing the unfavourable performance of our exports are likely to continue. This is particularly so with respect to industrial exports.
Exports of garments that constitute over one half of industrial exports are feeling the pinch and the lay-offs in garment factories are indicative of not only the past performance but future prospects. Even orders once placed have been cancelled. Performance of agricultural exports is likely to improve with favourable prices. Rubber prices are on a revival and tea prices are high though the country has not been able to obtain the benefit owing to a shortfall in production.
The most unfavourable aspect in the trade balance is on the import side where the rise in import prices is likely to increase import expenditure. Much of the relief on the trade balance in the first four months of the year was due to the fall in oil prices. Oil prices have climbed to over US$ 70 a barrel. The increase in prices of petroleum products in the country is in response to this.
This domestic increase in prices is likely to have very little effect on domestic demand but would lead to inflation and impact on export competitiveness if the exchange rate remains stable. There is also a likelihood of increased demand for some important essential food items. A shortfall in paddy production is likely to result in higher rice and wheat imports. Increased expenditure on oil, wheat and rice imports could increase the trade deficit significantly.
On the side of capital inflows too there are risks. Private remittances are threatened by the global recession. In the first four months private remittances decreased by 5 percent compared to the same four months of last year. This reflects mainly the depressed job markets in countries to which Sri Lankans have gone or are going.
The prospects of new employment opportunities declining and wages not rising could increase the trend of declining remittances witnessed in the first few months of the year. The expectation of increased tourist incomes is also likely to be blunted by the global recession in tourism. In the first quarter of this year global tourism fell by 8 per cent. Although local conditions have improved and some travel advisories have been lifted, the global recession is likely to impact unfavourably on tourist earnings.
Although the Colombo Stock Market has risen significantly and foreign investments have been a key factor, its impact on the balance of payments has been negative. The development in the CSE however good they may be in terms of the stock market performance has not been of benefit for the balance of payments. While there has been an inflow of Rs.16.01 billion into the market, the outflow has been higher. Compared to an inflow of Rs. 16.01 in the first half of the year, there has been an outflow of Rs.16.40 billion. Therefore the net position is a balance of payments deficit of 383 million.
Although the urgency of the IMF loan has waned with the country’s foreign reserves rising to US$ 1.4 million, the IMF loan would make the country’s reserves far more comfortable. This is especially so as the emerging external trade developments and the capital inflows are unstable. Although the current reserves are adequate to finance about two months’ imports, this could change if oil prices climb higher. There is a prospect of commodity prices rising on the international market and our demand for imports rising as well.
Besides this the terms of the IMF loan is favourable and the conditions imposed by the IMF would induce fiscal discipline. We may have little or no way of influencing the decision of the IMF but the country should wish that it would be granted in due course. |
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