The International Monetary Fund (IMF) March 4 rejected a President Sirisena government’s request for a $US4 billion loan in order to restructure debt repayments on high-interest Chinese loans negotiated by the Rajapakse regime .
The decision was announced in Colombo after a nine-day review of the Sri Lankan economy by the IMF’s Post-Program Monitoring Mission team headed by Todd Schneider. The IMF insisted that the government had to maintain its target budget deficit of 4.4 percent of GDP this year. Finance Minister Ravi Karunanayake met IMF chief Christine Lagarde in Washington last month. Besides the $4 billion loan, he sought rescheduling the payment of instalmens on an earlier IMF loan.
The IMF doesn’t think that the Lankan fianances are bad as of now. Schneider, told the media in Colombo that there was no need for a bailout.
Sri Lanka’s foreign reserves are “comfortable,” he said, and the current situation was different to 2009 when the previous government obtained a bailout loan of $2.6 billion loan to avert a balance-of-payment crisis. He added that the situation could be reviewed. His position was in sharp contrast to the stand taken by the IMF last year when it warned that Sri Lanka was vulnerable to external shocks due to high level of commercial loans.
Some economists hold the view that the real reason for the IMF refusal is its unhappiness with Srisena’s government’s decision to hike salaries and pensions and welfare budget.
On his part, the IMF Mission leader said the Sri Lankan government would have “difficulty in keeping to the budget deficit target of 4.4 percent due to a rise in expenditure caused by salary hikes and poor tax collection”. He insisted on the need for “structural reforms” and enhanced productivity and competitiveness.
The IMF insisted that the Sirisena government prepare contingency measures to meet any revenue shortfall. It also voiced its displeasure over a partial reduction of import taxes on some food items and the imposition of various one-off taxes on the super profits of the corporate sector, the telecom sector, alcohol manufacturers, and on newly-built large houses. These one-off tax measures, Schneider said, “do not constitute a step towards a more effective tax system.”
The budget proposals reflect Sirisen’a poll pledges. He had promised voters that if elected he would introduce a “one hundred days” reform program. The new government faces parliamentary elections in June and is attempting to use its recent budget measures to win popular support.
The government has promised a 10,000-rupee salary rise for public sector employees with a 5,000-rupee allowance from February and another 2,000-rupee allowance in June. While taxes of some food items have been reduced, the price of rice, the most essential staple, has increased
The IMF also noted that Sri Lanka’s debt was currently equivalent to 88.9 percent of the country’s $60 billion economy, a dramatic increase in its debt to GDP ratio, which was at 78.3 percent in 2013.
The IMF wanted the Central Bank to tone down intervention into foreign exchange markets to defend the rupee. "Intervention should be limited to dealing with excessive short-term volatility,” Schneider said.
The Lanka rupee dropped from 129 against the US dollar last August to 135 this January; it is currently about 132, with continuing downward pressure. Central Bank interventions have slashed Sri Lanka’s foreign currency reserves from $9.2 billion last June to $7 billion this February.
Pressure on the exchange rate is said to be mainly because of international speculators, who previously bought Sri Lankan treasury bonds, are now selling them and investing in more profitable markets. The IMF’s refusal to grant a bailout loan will see push Sri Lanka into more borrowings and consequently a bigger debt burden.
The IMF has predicted that Sri Lanka’s economic growth will be 6 to 7 percent this year, claiming that it was “relatively robust.” This growth, however, is mainly dependent on infrastructure projects, tourism and remittances from expatriate Sri Lankans, sectors acutely sensitive to the global economy and international geo-political pressures.
As the Sirisena government shifts its foreign policy orientation and strengthens its ties with India and US, tensions are increasing between Beijing and Colombo and compounding Sri Lanka’s economic crisis.
This was highlighted when Colombo suspended the massive $1.4 billion, Chinese-financed, Colombo Port City project. During the past five years China invested $5 billion in Sri Lanka.
—POREG TEAM
