Crucial IMF meeting on Sri Lanka loan

( April 01, 2012, Colombo, Sri Lanka Guardian) The Executive Board of Directors of the International Monetary Fund (IMF) meets tomorrow (Monday) for a crucial session to decide on the final tranche of a US$2.6 billion loan to Sri Lanka. The board will be considering the seventh review of an IMF mission that visited Sri Lanka last month ahead of approving the final tranche of US$800 million which, if granted will be disbursed at a higher interest rate of 3.1 % against 1% for the earlier tranches.

IMF Mission Chief Brian Aitken (centre) with two officials just outside the CB building after a briefing in Colombo in February. Pic by Nilan Maligaspe

Bankers say that if the IMF doesn't approve the final tranche it could adversely affect an already-volatile foreign exchange market and erode public confidence. Central Bank (CB) officials including the Governor Ajit Nivard Cabraal were tight-lipped on the meeting, declining to comment on its possible outcome or on whether the CB was seeking the last tranche, except to say there has been an 'exchange of letters' between the CB and the IMF since the last mission visit. Economists said it was crucial that Sri Lanka receives the balance money to offset a high trade deficit and halt further foreign exchange volatility.

"There is no doubt we need this money to restore public confidence. Interest rates have risen, the balance of payments is weak and constant foreign exchange volatility reflects a lack of public confidence," noted Prof. Sirimal Abeyratne, economist from the University of Colombo. "Importers are buying in advance fearing the dollar will rise further while exporters are holding onto their proceeds anticipating a further fall in the Rupee," he added. The Rupee stabilised this week to Rs 128 per $1, down by two rupees from Rs 130 last Friday, after some banks unloaded dollars in the market on Wednesday.

Last month, the CB brought in significant policy changes in the market while IMF mission officials were in Colombo and after they went back to Washington. On February 3, Friday while the delegation was meeting the media, the CB announced a credit squeeze and raised interest rates aimed at curbing credit growth and non-essential imports. On February 15, the CB said it was withdrawing from intervening in the foreign exchange market which saw the dollar rising sharply from around Rs 108 to 128 this week. At a recent public meeting, IMF Country Representative Koshy Mathai said the balance tranche of $800 million, if approved, will be given in two installments of $400 million each.

The CB for two years intervened in the foreign exchange to prop up the Rupee at artificially high levels, until it pulled out last month. In September 2011, the IMF expressed concern over foreign reserves dwindling and called for a more flexible exchange rate policy, a call that was initially rejected by the CB. Prof. Abeyratne said that there is no need to borrow or depend on others if a country's policy reforms are on the right track with export growth and foreign exchange stability. "Unfortunately this is not the case in Sri Lanka and we don't have a choice but to seek external support and when that happens, it comes with conditions.

This is not because the IMF or World Bank wants it but because Sri Lanka needs it to improve financial stability and governance." He said just before the IMF Standby Arrangement (loan) was approved in 2009, foreign investor confidence was low. It improved soon after the fund came in and bonds also drew investments at attractive rates. "If the IMF moves out at this time, this would hurt the confidence factor, he added.