The International Monetary Fund (IMF) has urged Sri Lanka to allow sufficient two-way flexibility of the exchange rate to help support the external position and meet the foreign reserves target while strengthening the resilience of the country’s financial sector.
Suggesting this at a news conference on Tuesday, IMF Colombo Representative Koshy Mathai said that this meant allowing a small appreciation or depreciation depending on the market behaviour.
Announcing the immediate disbursement of an amount equivalent to SDR 137.8 million (about US$ 218.3 million) as the 7th tranche of the IMF Stand-By Arrangement (SBA), Dr Mathai said that the IMF will discuss ways and means to handle the excess money in Sri Lanka's banking system in a bid to contain further inflation which is running at 8.6 %. The 7th tranche has brought the total disbursements under the arrangement to an amount equivalent to SDR 1.10 billion (about US$ 1.75 billion), he said.
The IMF executive board completed the 6th review under the SBA and approved the latest disbursement after waiving off the country’s requirement of economic targets on net international reserves, reserve money and net domestic financing of the central government for the 30-month period ending March, as these details were not available at present. The IMF teams will visit the island once in every three months and the disbursement under the SBA will be made on a half yearly basis, with disbursements doubled, based on a request made by the Sri Lankan government. “If Sri Lanka earlier received around US$ 200 million each quarter, it would now receive around US$ 400 million every six months," Dr. Mathai said. The balance funds of US$ 900 million under the SBA will be disbursed in two tranches following two reviews of the programme which will be concluded by May next year.
Expressing satisfaction at the handling of Sri Lankan economy Dr. Mathai stressed the need of the Central Bank’s continuous monitoring of inflation rates. “We are happy with the way Sri Lanka’s economy has progressed and the government’s policy reforms,” he noted.
He said that they anticipate an increase in the inflation rate in the next few months, but the IMF is not suggesting that the Central Bank should tighten monetary policy that will slow down the economy. Referring to the recent fuel price hike he said that this was unavoidable in the circumstances of sky rocketing world oil prices. He added that the government should look into the welfare of the poorest sector but not rich people travelling in Prados who can afford to pay high prices for fuel. "It will be important to allow adjustment of domestic prices to reflect fluctuations in international fuel prices," he said. The IMF Representative emphasised the need for the Government to provide targeted subsidies rather than raising policy rates that would have an adverse impact on larger numbers.
In a March 15 joint letter to IMF Managing Director Domique Strauss-Kahn, Deputy Finance and Planning Minister Gitanjana Gunawardene and Central Bank Governor Ajith Nivard Cabraal requested that the SBA agreement end (ahead of schedule) on May 23, 2012 and modify the programme accordingly so that the IMF reviews are changed to semi-annual from quarterly reviews. Similarly, the government has requested, in the letter, for semi-annual disbursements and not quarterly ones.
The letter said the government is committed to bringing the combined budgets of the Ceylon Petroleum Corporation and the Ceylon Electricity Board to balance by end-2011, ‘although we recognise that achieving this goal will be challenging given emerging developments in international oil prices’.
The government said it will continue with cost-cutting efforts while ensuring that the revenue structure for these enterprises remains sufficiently flexible to achieve this goal. “We intend to amend the Petroleum Act to strengthen the regulatory framework to make it more comprehensive, and cabinet approval of these amendments by end-September,” the letter said. |
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