COLOMBO: The International Monetary Fund has released 162 million US dollars under its three year program with Sri Lanka saying economic conditions have started to improve and tax hikes are helping improve budgets.
“Sri Lanka’s performance under the Fund-supported program has been broadly satisfactory despite challenging circumstances,” Deputy Managing Director, Tao Zhang, said in a statement.
“Macroeconomic and financial conditions have begun to stabilize, inflation has trended down, and the balance of payments has improved. Meanwhile, international reserves remain below comfortable levels.”
Sri Lanka’s reserves are not picking up as fast as expected partly due to outflows from bond markets, but analysts have noted that strong domestic credit has halted the growth in reserves, which began after a deal with the IMF.
Sri Lanka earlier lost reserves after the central bank failed to tighten monetary policy as budget deficit deteriorated in 2015, and instead printed money and kept interbank markets flushed with excess liquidity.
The newly printed liquidity boosted loanable reserves of banks above the deposits raised, pushing credit and imports to unsustainable levels, causing foreign exchange outflows to exceed inflows.
Since a program with the IMF was signed, markets have been kept short after interventions in forex markets.
In order to reverse the outflows and re-build forex reserves the central bank has to buy dollars in the forex market and sterilize or mop up the rupees created by slowing domestic credit, which probably requires a slightly higher interest rates than now analysts say.
Reserves can also be re-built without raising rates by depreciating the currency and impoverishing an entire population, destroying their real purchasing power and the real capital available for job-creating investment and growth. Sri Lanka engaged in both actions after the bout of money printing in 2015.
“While inflation has abated, credit growth remains strong,” Zhang said. “The central bank indicates its readiness to tighten the monetary policy stance further if inflationary pressures resurge or credit growth persists.
“The authorities intend to continue building up reserves through outright purchases while allowing for greater exchange rate flexibility.”
Sri Lanka raised taxes in 2016 and has proposed further tax hikes in a budget for 2017 to get more money from citizens to meet the expenditure of rulers. Zhang also urged Sri Lanka’s rulers to keep a watch on spending.
“Fiscal performance has been encouraging,” Zhang said. “The reinstatement of the amendments to the value added tax will help boost revenues.
“The 2017 budget proposal aims to strengthen government finances through revenue mobilization, while guarding against revenue shortfalls by aligning spending with revenue on a quarterly basis.”
