Date: 2012-01-25

By Charumini De Silva

The last tranche of the loan extended by the IMF to Sri Lanka hangs in the balance largely owing to the poor performance of the country’s economy.

The IMF loan facility amounting to 2.6 billion US Dollars was negotiated in 2009 and the last tranche is due in April. A delegation of the IMF is now in Colombo to review the position of the country’s economy.

The trade deficit of Sri Lanka when the IMF loan facility was made available stood at 5 billion US Dollars. But it went up to 7.7 US Dollars in October last year.

Expert economists point out it is likely to go up to 9 billion US Dollars by the end of this year. Under these circumstances, the IMF has told Sri Lanka to increase the export volume in order to earn more foreign exchange and to attract foreign investors.

The IMF has indicated that the rupee is overvalued by 20 percent and to act accordingly by floating the currency.

It is learnt that the Central Bank has already sold 6 billion worth of US Dollars of Sri Lanka’s foreign reserves to hold the rupee at the present rate.

On top of all this, during the unveiling of Central Bank’s “Roadmap for 2012 and beyond”, Central Bank Govenor Ajith Nivard Cabraal said Sri Lanka will negotiate for a second facility soon.

With the present development however, the Central Bank has refused to submit to the directives of the multilateral donor agency.

In an exclusive interview with the Ceylon Today, Central Bank Governor Ajith Nivard Cabraal, staunchly defended the move not to devalue the rupee further.

“Our interventions in the Foreign Exchange (Forex) market have been prudently and carefully planned with absorptions of forex done well in advance, so that the necessary supply could be provided in periods where shortages have been anticipated,” the Central Bank Governor said.

“Essentially, we have provided flexibility to the currency, based upon a longer term time horizon, without allowing distortions to take place in the market, because of Forex availability or otherwise, on a daily or weekly basis.”

“Our policy has also been forward-looking, which has taken into consideration the inflows and outflows over the immediately foreseeable period.  In our view, such a policy is fully consistent with the role entrusted to the Central Bank as per the Monetary Law Act to deliver stability to the economy.”

“Also, any person would have to concede that our policy has worked in practice, because our economy has been able to record major successes, whereas financial chaos, lack of confidence, sluggish growth, volatile markets and intense instability have been the prevailing order in the world”.

However, the IMF last year warned that Central Bank intervention was threatening the non-borrowed foreign exchange reserve position, and withheld the eighth tranche of a US$ 2.6 billion loan as a result.

Sri Lanka is targeting US$ 25 billion in inflows in 2012, a 31 percent increase from the US$ 19 billion in 2011.  Although the US$ 59 billion economy was forecast to have grown by eight per cent last year, Sri Lanka is expected to have recorded a balance-of-payments deficit in 2011.

Foreign exchange reserves fell by 27 per cent in the last five months of 2011 to US$ 6 billion, the cost of supporting the rupee while many other Asian peers let their currencies fall.

The IMF team is due in Sri Lanka today ( January 25) to review Sri Lanka’s performance under the loan program, and sources close to the global lender have said it will not release any more money until the Central Bank allows more rupee flexibility. (Ceylon Today Online)