by Malladi Rama Rao
A high level IMF mission visited Sri Lanka this month and reviewed the progress of a $1.5 billion loan approved in the middle of last year as the island nation was struggling with heavy debts and balance-of-payments pressure.
The IMF managing director, Christine Lagarde, was also due to visit Colombo in the first week of March but did not. No new date has been announced. “Unfortunately, due to an unforeseen change in her schedule, she (Christine Lagarde) will not be able to visit the country… She is looking into the possibility of visiting Sri Lanka in the near future,” said IMF spokesman Gerry Rice in a statement.
The IMF loan was to disburse in six instalments. It has already released two instalments worth $325.2 million.
On its part the Sirisena government had pledged to reduce the fiscal deficit to 3.5 percent of gross domestic product by 2020, which is half the deficit for 2015. The target will be achieved by restructuring state-owned Ceylon Petroleum Corporation (CPC), Ceylon Electricity Board (CEB), Sri Lankan Airlines, National Water Supply and Drainage Board (NWSDB), Airport and Aviation Services, and Sri Lanka Ports Authority.
Colombo also promised to slash subsidies and hike taxes where possible. It has since hiked the value added tax (VAT) from 11 percent to 15 percent, and cut expenditure on education and health by about 46 and 8 percent respectively.
The IMF team has held talks with Finance Minister Ravi Karunanayake and Treasury officials on Feb 24. The discussions focused on “how to improve the performances of state-owned institutions,” Finance Ministry Secretary R.H.S. Samaratunga told the Daily News. He added that the effort is to get these enterprises at least to the break-even level of performance.”
Among other items discussed was the sale of “non-strategic” assets such as the Colombo Hilton Hotel, Lanka Hospitals, the Hyatt Hotel and Sri Lankan Airlines. The IMF has estimated their sale could earn the government $1.5 billion.
Colombo is not averse to implementing these measures but it doesn’t want to trigger hardships to the people below the poverty line. Any discontent among the people will provide the opening former President Mahinda Rajapaksa needs badly to bounce back on the centre stage. He has already floated the National Assets Protection Center to oppose privatisations. That the present distressed economy is a Rajapaksa legacy is not disputed. Nor is the fact that while in office from 2006 to 2014 he toed the IMF line for a bail out and made common man’s life miserable with his wage freeze, and job cuts.
Undoubtedly, these are tough times for President Sirisena. Forex reserves have dropped to $5.5 billion in January, a fall of half a billion dollars over the previous 12 months. Trade deficit is galloping towards a new peak of more than $9 billion. In 2015, foreign direct investment totalled only $600 million and further deteriorated to $300 million in 2016. There has been an increasing flight of capital in recent weeks, in response to the US Federal Reserve hinting it would increase interest rates. According to a media report, the Templeton Fund has taken away USD 1,475 million of invested funds from Sri Lanka during the past fourteen months.
Will Sri Lanka be pushed to default on its loans? Answer is both yes and no, though this is a spectre the IMF has reportedly raised. The government is seeking to raise $3.6 billion for the settlement of loans and interest payments this year, almost double last year’s requirement of $1.82 billion.