Central Bank now says ‘willing to cooperate with the IMF’

The Central Bank (CB), whose Governor Ajith Nivard Cabraal has firmly stated in the past that there is no need for an International Monetary Fund (IMF) programme to resurrect Sri Lanka from the current economic crisis, on Saturday said it was ready to cooperate with the IMF.

“With the Government indicating that it is seeking a closer engagement with the IMF, the CB stands ready to cooperate in such an engagement,” it said in a statement after the IMF issued its Article IV Staff Report on Sri Lanka.

Governor Cabraal has, in the past, repeatedly opposed any IMF programme. When the IMF sent a team to Sri Lanka for talks with President Gotabaya Rajapaksa and Finance Minister Basil Rajapaksa, Mr. Cabraal had said it was more to offer technical assistance. After the meeting with the IMF, the President said they would seek the assistance of the world financial body but didn’t say whether it was technical assistance or a financial bailout programme.

Finance Minister Rajapaksa is visiting Washington next month with a team of officials for further discussions with the IMF with analysts saying it is likely that Sri Lanka would agree to a fund-managed bailout plan.

The IMF in its report released on Friday said that Sri Lanka has been experiencing a combined balance of payments and sovereign debt crisis.

“In staff’s view, public debt has become unsustainable, and gross reserves are critically low and insufficient to cover near-term debt service needs. While the authorities’ efforts to raise new forex (FX) financing could provide breathing space in the short term, it remains unclear how the large FX debt service obligations beyond 2022 can be met. A successful vaccination campaign has led to improved prospects for tourism, but the near and medium-term growth outlook is clouded by heightened macroeconomic imbalances, FX shortages, and suspension of non-priority imports. The large public debt burden has subordinated monetary and exchange rate policies to fiscal needs and continues to hinder the CB from pursuing its price stability objective,” the report said.

The CB statement said that it has continued to publish its analysis, in addition to providing further in-depth analysis on policy matters to the Government and engaging in a continued close dialogue with the Government on the same.

At the same time, several policy adjustments have already been made by the Ministry of Finance and the CB which include monetary policy tightening since August 2021, allowing exchange rate flexibility, removing restrictions on foreign exchange market transactions, implementing  envisaged revenue enhancing measures, and allowing market-based price adjustments to key commodities.

The CB floated the rupee in mid-March with the dollar rising to Rs.295 in the official money markets this week.