IMF tells Sri Lanka to rebuild reserves, be ready to tighten
Posted on March 7th, 2017
By Shihar Aneez Courtesy Nasdaq
COLOMBO, March 7 (Reuters) – The International Monetary Fund urged Sri Lanka’s central bank on Tuesday to rebuild foreign reserves while maintaining exchange rate flexibility and to be ready to tighten monetary policy if credit growth or inflation do not abate.
Following its second review of a $1.5 billion three-year loan programme, the IMF said it had discussed with Sri Lankan authorities the need to push forward with reforms due to an uncertain external environment.
Generally, the IMF delays disbursements if countries drastically deviate from targets, but the IMF did not say whether it would hold back the third tranche of $119.9 million, due on April 20.
“To this end, it is important for the government to continue on the revenue based fiscal consolidation and generate adequate resources to support its social and development objectives while maintaining debt sustainability,” the IMF said in a statement.
Deputy Central Bank Chief Nandalal Weerasinghe said though the end-2016 foreign reserve target was missed, authorities are working on end-June 2017 goals.
“The central bank has already allowed flexible exchange rate from early this year,” he told Reuters.
On Jan. 3, central bank Governor Indrajith Coomaraswamy said defending the rupee with foreign exchange reserves “doesn’t seem sensible” as it has always been followed by a sharp depreciation in the currency. Finance Minister Ravi Karunanayake said the government authorities had a “successful meeting” with the IMF.
The IMF warned that a more prolonged drought could raise food and oil imports, and have an adverse impact on growth, inflation, and the balance of payments.
Sri Lanka’s worst drought in 40 years may cost up to $264.7 million, but should not worsen the fiscal deficit, the finance minister said last week. The central bank is struggling to maintain a flexible exchange rate in the face of heavy foreign outflows from government securities. The rupee has depreciated 1 percent so far this year, having lost 3.9 percent of its value against the dollar last year.
The central bank tightened monetary policy three times in seven months through July last year to curb high credit growth and inflation. But those moves have dragged on the economy.