IMF not happy about exchange rate policy

By Bandula Sirimanna

The International Monetary Fund has cautioned Sri Lanka about the steady decline in non-borrowed foreign reserves and the Central Bank (CB)’s repeated intervention in the foreign exchange market without allowing more exchange rate flexibility.

Flexibility in the exchange rate, which has appreciated substantially in real terms over the past two years, is an essential component in ensuring Sri Lanka’s export competitiveness, the IMF’s Resident Representative Koshy Mathai said in a keynote address at the 10th sessions of the Sri Lanka Economic Association (SLEA) at the Centre for Banking Studies in Rajagiriya.

Dr Mathai’s comments reflected the concerns expressed by the IMF last month, after a review mission.
On Friday, Dr Mathai told the Sunday Times on the sidelines of the SLEA sessions that the IMF was holding talks with the Central Bank on the disbursement of two tranches of US$ 400 million each under its US$ 2.6 billion Structural Adjustment Facility. Analysts believe the delay in the release of the tranches was largely because of the CB’s non-compliance with the IMF’s request to adopt a flexible exchange rate based on demand and supply.

Dr. Mathai said the IMF’s stance had not changed. The Central Bank should desist from intervening in the foreign exchange market after a steady decline in non-borrowed foreign reserves.

Sri Lanka has US$ 8.1 billion in foreign reserves, sufficient for more than five months’ of imports. However, a considerable amount of the reserves consist of foreign borrowings. The CB obtained another Euro Bond loan of US$ 1 billion recently at a high interest rate to repay previous loans.

“The uncertain global environment underscores the importance of continuing to build foreign exchange reserves. While headline reserves are at a comfortable level, buoyed by the Central Bank’s purchase of the proceeds from the recent 10-year Eurobond, non-borrowed reserves — that is, excluding Eurobonds, IMF disbursements, and foreign holdings of Treasuries — have steadily declined, reflecting foreign exchange sales by the Central Bank,” Dr Mathai said.

The IMF has already disbursed US$ 1.8 billion of the loan and the balance $ 800 will be disbursed in two tranches of $400 million each.

Officials said Sri Lanka believed the delayed eighth tranche would be released before the end of this year, and a delay would not pose an immediate problem to the country.Dr. Mathai said that in spite of the Middle East crisis, the financial crisis in Europe, and the US debt crisis, Sri Lankan exporters had performed well, recording a 30% growth in the first few months of this year.

He said that Sri Lanka should try to concentrate its exports to emerging economies like China and India to get better benefits. The country should expedite the implementation of the Comprehensive Economic Partnership Agreement (CEPA) with India to penetrate the huge Indian market, he said.

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