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There is quite some uncertainty as to whether the government wouldborrow from the IMF to tide over the current Balance of Payments (BoP) crisis. The Governor of the Central Bank of Sri Lanka has gone on record recently that we will not go with a begging bowl to the IMF to borrow as the country has other sources from which it could borrow.

The country is in the throes of a severe (BoP) crisis as the current foreign exchange reserves are inadequate to meet the impending debt servicing costs. Although borrowing from the IMF is a much debated topic within Sri Lanka, it is vital that we obtain an IMF loan facility to bail us out of the current serious crisis in foreign reserves

On the other hand, there is news that the government has sought a loan of 1 billionUS dollars from the IMF that has laid down stringent conditions for giving the loan. This involves the overhauling of the country’s tax system to yield much higher revenuesvia revisions in the Nation Building Tax (NBT), Value Added Tax (VAT) and personal taxation. The Finance Minister does not appear to be in agreement with an upward revision of these taxes. However, the Prime Minister appears to be of a different view.

Severe BoP crisis
The country is in the throes of a severe (BoP) crisis as the current foreign exchange reserves are inadequate to meet the impending debt servicing costs. Although borrowing from the IMF is a much debated topic within Sri Lanka, it is vital that we obtain an IMF loan facility to bail us out of the current serious crisis in foreign reserves.

The BoP difficulties the country is facing aredue to several factors. The large trade deficit of about 8 billion US dollars is a core reason. It has been caused by the large fiscal deficits that increased imports, the fall in exports owing to global conditions, and a flight in capital owing to domestic and international reasons. The growth in workers’ remittances has also slowed down owing to thefallingof international oil prices.

It is vital that we address this crisis at our earliest, before it turns out to be too serious. Obtaining an IMF loanfacility is far more favourable than relying on international commercial borrowing as its interest costs are lower and conditions for repayment are easier.If Sri Lanka steps on to borrow from the latter, the high interest rates and short repayment periods would lead to higher debt servicing costs, which are significantly high in Sri Lanka even now.

However if we are to obtain the loan facility, the IMF requires Sri Lanka to bring down the fiscal deficit to below 5 per cent this year and gradually lower it in the 4 years to come. As per their estimate, the deficit is higher than 5.9 which is mentioned by Sri Lanka in its Budget 2016. The IMF will especially look into how the Sri Lankan government tries to reduce its fiscal deficit via policy implementation in the right direction. Bringing the fiscal deficit down would enhance macroeconomic stability which would strengthen the country’s economic prospects.

Borrow from IMF
Amidst all the controversies heard in the local context, it is essential that we borrow from the IMF in order to resolve the BoP crisis, which needs serious policy measures, if we are to achieve favourable macroeconomic fundamentals. This is further ascertained by the favourable interest rates and gestation period attached to the loan.

The fiscal prudence which would lead to fiscal consolidation is a much felt need in Sri Lanka.Then again, it does not mean that the loan will completely solve our fiscal problem, but it will address our urgent need of liquidity and contribute largely to reduce the negative impacts of weak fiscal governance, which has been prevalent over the years. In addition, obtaining of this loan would assist us in establishing positive political relations and strengthening investor confidence whichwould in turn contribute to achieve macroeconomic stability and economic growth in Sri Lanka, as long as government does not take the loan for granted!

  • Pradeep De Alwis

    Well written article which gives a nice summary of a very complex scenario.