IMF gives Govt. good governance nod

Thursday, 5 March 2015 00:24 - - {{hitsCtrl.values.hits}}

Insists fiscal consolidation crucial to manage debt, says intervention in forex should stop Tips growth to be 6-7 % in 2015, wants support for structural reforms Warns budget deficit “challenging,” one-off tax measures negative for an effective tax-system By Uditha Jayasinghe Giving a cautious nod of approval to the Government, the International Monetary Fund (IMF) yesterday noted Sri Lanka’s economic prospects remain favourable, but insisted medium term fiscal consolidation for durable debt repayment and a free floating exchange rate remained crucial. The staff mission led by Todd Schneider was in Sri Lanka to conduct a post-program monitoring mission after the successful completion of a $ 2.6 billion IMF stand-by agreement in 2012. Discussions did not include a possible $4 billion loan that the Government is reported to be currently negotiating with the IMF.

“Growth is likely to continue in the relatively robust range of 6-7% in 2015. Inflation is expected to remain the low single digits, although some upward pressure may emerge as higher wages and salaries translate into increased demand,” Schneider said. The external current account is expected to strengthen further in 2015 on low oil prices, export growth and inward remittances. The mission agreed with local authorities that sustaining robust growth over the medium term will require continued commitment to policies in support of macroeconomic stability, and structural reforms to enhance productivity and competitiveness. While welcoming the new Government’s focus on improving good governance, financial discipline and increased transparency the IMF voiced concern over the budget deficit of 4.4% as “challenging” and warned authorities to consider contingency measures should revenues fail to materialise as projected. They also insisted medium term fiscal consolidation was necessary to ensure reduction in Sri Lanka’s debt, which is currently 88.9% of its $ 60 billion economy. The IMF also called for renewed attention to the Presidential Tax Commission report, which was the brainchild of former President Mahinda Rajapaksa’s Government as it contained “good” policies to streamline local taxes. The next mission in April is likely to discuss its infusion and look deeper into the tax structure. “One-off tax measures introduced to finance the interim Budget do not, in the mission’s view, constitute a step toward a more effective tax system. The mission and the authorities agreed on the need for more comprehensive reforms to streamline the tax system and reduce or eliminate exemptions to put revenues on a steady upward path.” Schneider’s team also called for toned down intervention on the exchange rate, which had significantly depleted reserves over the past six months. “The mission noted the decline in Central Bank foreign exchange reserves over the last six months. We highlighted the need to preserve Sri Lanka’s cushion of foreign exchange reserves and in this context emphasized the need for exchange rate flexibility. “ “Intervention should be limited to dealing with excessive short term volatility,” the IMF advised. Nonetheless Schneider acknowledged the current exchange rate does not appear out of line with fundamentals, particularly given the projected improvement in the balance of payments. Sri Lanka’s rupee has depreciated significantly dropped from 129 against the dollar to 132 and in January hitting a low of 135 before regaining stability.

IMF rules out fresh bailout

AFP/COLOMBO: The IMF on Wednesday (4 March) ruled out a fresh bail-out for Sri Lanka, which had hoped to secure loans of more than $ 4 billion to restructure expensive debt taken on by the previous regime. Much of the country's post-war infrastructure under the administration of former president Mahinda Rajapaksa was funded with Chinese debt and the new government had hoped to retire some of those loans. Finance Minister Ravi Karunanayake travelled to Washington last month to try to secure loans from the International Monetary Fund and the World Bank. But IMF experts who reviewed Sri Lanka's economy during a nine-day visit said the Indian Ocean island was not facing an immediate crisis. Delegation leader Todd Schneider said Sri Lanka's foreign reserves were comfortable compared to 2009, when it obtained a $ 2.6 billion bailout at the height of a civil war. "The situation today is quite different," Schneider told reporters in Colombo. "We only provide balance of payments support." Sri Lanka's economy is among the fastest growing in South Asia. But the IMF last year warned the island was vulnerable to sudden external shocks due to high levels of foreign commercial borrowings. By the middle of last year, Sri Lanka's foreign borrowings stood at $ 42.4 billion, up from $ 39.7 billion at end 2013, a figure the IMF considers high. The country's economy grew by a blistering 8% in the first two years after the end of a decades-long Tamil separatist war in 2009, but growth has since moderated. The IMF is forecasting a growth rate of 6 to 7% this year, down from an estimated 7.4% last year.