The International Monetary Fund (IMF) today said it is “considering options” for Sri Lanka in response to the call by Prime Minister Ranil Wickremesinghe that Sri Lanka would seek an IMF stand-by arrangement to fend off a risk that its economy will be hurt next year by repercussions from events affecting major economies. In response to e-mailed questions by Bloomberg, Eteri Kvintradze, the IMF’s representative in Colombo said that IMF’s response would depend on an assessment of macroeconomic vulnerabilities, the nature and size of balance of payments needs, and government policies “to address these vulnerabilities.
“However, we have not formally entered into program negotiations nor do we have any new missions to Colombo scheduled outside of technical assistance and regular surveillance,” Bloomberg reported today quoting Eteri Kvintradze.
Sri Lankan Prime Minister Ranil Wickremesinghe this week said the government has informed the IMF of the need to have a standby agreement. The rupee is poised for its steepest decline since 2012 after the central bank in September eased intervention in the currency to salvage dwindling reserves.
Sri Lanka, which last sought an IMF loan in 2009 following the end of three-decade old civil war, had $6.46 billion of reserves as of August. While that’s enough to cover four months of imports, the government is concerned falling exports amid slowing growth in China, and a weak economic recovery in Europe may worsen the island-nation’s finances, according to Kvintradze.
“Domestic macroeconomic policies are also an issue,” Kvintradze said. “IMF staff has some concerns with the proposed 2016 budget, which does not envisage significant consolidation relative to the expected out turn for 2015.”
Sri Lanka’s 2016 budget announced Nov. 20 forecast a fiscal deficit of 5.9 percent of gross domestic product, narrowing from 6 percent this year. It included measures to boost foreign investment in a bid to spur confidence and stem the decline in the currency and deteriorating balance of payments.
Sri Lanka is aiming to increase investment and revenues to help reach a 3.5 percent budget deficit in 2020, Wickremesinghe said Dec. 2.
Even if Sri Lanka meets its 2015 target, the government’s fiscal position will remain weaker than most similarly rated sovereigns, Moody’s Investors Service said last month. The company has a B1 rating for the nation, a so-called junk assessment that indicates high credit risk.
Sri Lanka’s economy has been growing too fast, financed by unsustainable debt, and needs to adjust by “plugging the funding gap more sustainably through bilateral funding,” according to Natixis SA.
“There are plenty of lenders out there who would be willing to invest in Sri Lanka, even as they will require more fiscal constraints,” Natixis analyst Trinh Nguyen wrote in an e-mailed report yesterday.