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“The Government does not fall in line mechanically with IMF’s suggestions; as a sovereign country, we decide our fiscal policies after evaluating our national priorities,” said Prof. G. L. Peiris, Deputy Minister of Finance. Professor Peiris, Dr. Nadeem-Ul-Haque, Senior IMF Resident Representative, Treasury and Central Bank officials met the press Tuesday, to explain the agreement between the Government and the IMF for a loan of US $ 253 Mn. “Increasing our productivity levels is the only way to deal with the rising Cost of Living. Subsidies on consumer goods must be understood as someone paying for the consumption of another.” Professor Peiris emphasised the Government believes the people should be made aware of the contents of the IMF agreement and its short term and long-term implications. He was of the view that Sri Lanka should adopt a more realistic pricing mechanism for petroleum products, whereby the consumer stands to benefit if and when world prices drop.
Press ReleaseIMF Approves Stand-By Arrangement for Sri Lanka Endorsing the Country’s Economic Policies and Reforms Sri Lanka entered into a Stand-By Arrangement (SBA) with the International Monetary Fund (IMF) on 20 April, 2001 when the Executive Board of the IMF approved a 14 – month Stand-By credit facility of SDR 200 million (approximately US dollars 253 million) for Sri Lanka to support the government’s economic adjustment programme for 2001-2002. This will play a catalytic role in mobilizing a package of financial support amounting to more than US dollars 520 million for strengthening the macroeconomic stability of the country. The IMF provides financial assistance to member countries under a variety of policies and facilities. The amounts available, the interest rate charged and the repayment period vary according to the policies and facilities that are best suited to address to the type of balance of payments problem facing a given member in need of external financing. The IMF financing facilities play a catalytic role in helping the members to mobilize other donor support as well. Among such facilities, Stand-By Arrangements (SBA) allow member countries to utilize IMF resources to deal with temporary balance of payments problems. A typical SBA will be for a relatively shorter period, usually 12-18 months, than the IMF’s other financing arrangements. However, a SBA may be extended to even 3 years under special circumstances. It is subject to an interest rate decided under the IMF rate of charge, which is lower than the international market borrowing rates. The loans drawn under SBA have to be repaid within 3-5 years. This repayment period may be shortened to 2 –4 years, if the country’s external position allows an early repayment. The amount that can be borrowed under the SBA varies, subject to a ceiling of 100 per cent of the member’s quota annually and 300 per cent cumulatively. In practice, the average size of the SBA is about 40-50 per cent of a member’s quota. The present SBA programme approved for Sri Lanka is SDR 200 million (48.4 per cent of the country’s quota) compared with the SBA programme of SDR 100 million (44.8 per cent of quota) approved in 1983. Under the present SBA facility, Sri Lanka has already drawn SDR 103.4 million (US dollars 131 million), which is equivalent to 25 per cent of the country’s IMF quota, on 25 April 2001, as the programme provides a front loaded withdrawal facility. The remaining part of the facility will be made available in four tranches of SDR 24.2 million each on 30 August 2001, 30 November 2001, 28 February 2002 and 15 May 2002. The facility is subject to an interest rate of 4.38 per cent per annum, while the current borrowing rates from the international capital markets range between 7.5-10.0 per cent per annum. The loan is repayable in 5 years and the government of Sri Lanka can settle the loan earlier if the country’s external position improves faster than expected. The current SBA is a part of a broader financial package, which consists of substantial contributions from the other international financial institutions such as the World Bank and the Asian Development Bank, official bilateral donors and the private sector. In addition, Sri Lanka would also benefit from an expected increase in the flow of private foreign capital in the form of foreign direct investment and portfolio investment with the build up of investor confidence following the approval of the IMF supported programme. This would facilitate the rebuilding of country’s official foreign reserves, while continuing with the on-going economic reforms. The aim is to build up official reserves to a level of US dollars 1,500 million by the end of the year. This Stand-By Arrangement is a clear endorsement of the economic policies and reforms already adopted and to be adopted in the medium-term by the Government of Sri Lanka. The programme has been based on the government’s macroeconomic framework, policy adjustments and economic reforms, as announced in its recent policy statements such as Vision 21 and the budgets of past few years. The firm commitment of the government to restore macroeconomic stability through a number of policy initiatives has already been demonstrated. Sri Lanka adopted a new exchange rate regime on 23 January 2001 allowing the exchange rate to be determined by market forces. Budget 2001, which contains both short-term economic stabilization measures and those which are necessary to correct structural weaknesses in the fiscal area, has been formulated to return to a medium-term fiscal adjustment path. A number of revenue enhancing and expenditure containing measures have already been initiated this year to ensure the achievement of fiscal targets. Meanwhile, steps have been taken to minimize distortions in the pricing policy by adjusting administered prices to reflect market conditions. The government has also announced its policy relating to structural reforms, particularly in the financial sector, public enterprises, civil service and the labor market. Such reforms would facilitate fiscal consolidation, and improve efficiency and productivity in the country thereby helping to achieve a sustainable, high quality economic growth. Under the present SBA, the government is expected to achieve specific revenue and expenditure targets for 2001 and beyond, and reduces the budget deficit to 8.5 per cent of GDP in 2001. Underlying these expected developments is a reduction in the budget deficit to 4-5 per cent of GDP in the medium-term. These targets are essentially those announced by the government in the Budget 2001 and are compatible with the medium-term scenario envisaged in Vision 21. The SBA also envisages that the government would implement its reform agenda announced in several policy documents, including Vision 21 and Vision 2010. These include the restructuring of public enterprises, labour market reforms, civil service reforms and social safety nets. As set out in Vision 2010 and indicated in the SBA, monetary policy would primarily aim at price stability. As usual, under the programme, Sri Lanka is expected to adhere to certain targets given as performance criteria and indicative targets which are basically the expected targets in the government’s macroeconomic framework. The major policies and targets would lead to more investments, additional employment generation, external sector viability, lower inflation and a sustainable higher growth. Under the programme, Sri Lanka aims at reducing the rate of inflation to around 4-5 per cent in the medium-term and moving to a higher sustainable growth path. Sri Lanka envisages to achieve an annual growth of 6-7 per cent in the medium term. These policies also aim at strengthening external sector stability with a reversal in the drain on reserves. The successful completion of the programme would further strengthen the international donor support for the development process of Sri Lanka. As usual, the IMF will monitor and review the progress under the programme and the release of the remaining part of the facility would be based on the performance in the key areas referred to above. The
current SBA is the first step of moving towards a medium-term financial
support under the Poverty Reduction and Growth Facility (PRGF), a much
broader version of the previous Enhanced Structural Adjustment Facility (ESAF),
providing a larger financing facility at a more concessional rate. The
PRGF aims at making poverty reduction efforts a key and a more explicit
element of a renewed growth-oriented economic strategy, which would foster
sustainable high quality growth, leading to higher living standards and a
reduction in poverty on a more sustainable basis. Annex I The major policies and targets under the SBA and the expected benefits from them are as follows: 1. Reducing government borrowings from the banking system by reducing the budget deficit. · More credit will be available to the private sector leading to higher investment by the private sector thereby creating additional employment opportunities and bringing about a high economic growth · Reduced pressure on interest rates raising overall demand for investments · Contain government debt and interest payments thereby enabling the government to release more resources for development work · Contain monetary expansion thereby reducing pressures on inflation · Contain the pressure on the exchange rate to depreciate. 2. Reduce net domestic assets of the Central bank This implies that the Central bank’s credit to government should be contained. In addition to the benefits at (1) above, the potential for faster money supply growth through the creation of high powered money by the Central Bank is contained preventing potential inflationary pressure. 3. Increase international reserves · Build up market confidence, both locally and internationally · Assist in maintaining the exchange rate stability · Encourage private foreign capital flows · Improve the country’s ability to meet unexpected increases in demand for imports · Increase in foreign exchange earnings through higher interest income 4. Ceilings on short-term borrowings and non-concessional debt · Reduce country’s external vulnerability by limiting such borrowings · Improve international market confidence · Encourage private capital flows · Reduce pressure on foreign interest payments 5. Zero level of arrears on repayment of external debt (i.e. prompt payment of external obligations) · Maintain a high international confidence · Enabling framework for the country to raise funds internationally 6. Floor on government revenue and ceiling on primary fiscal balance · Maintain ability of government to meet budgeted expenditure · Avoid additional borrowing · Maintain government budgetary targets · Maintain market confidence in government 7. Limiting the stock of domestic debt of the central government · More credit available to the private sector · Reduced pressure on interest rates · Contain interest payments and enable the government to release resources for development purposes · Contain monetary expansion · Contain inflation · Reduce future debt service burden of the government · Provide more funds for domestic development 8. Ceiling on reserve money of CBSL (In addition to the benefits at (1) above) · Contain monetary expansion · Contain inflationary pressure 9. Reduce credit to public corporations · Help improve operational efficiency of corporations · Permit more credit to the private sector · Reduce monetary expansion · Contain inflation 10. Increase administrative prices of energy and transport · Reduce burden on government budget · Reduce losses in relevant institutions · Reduce borrowings, and hence interest payments, of relevant institutions · Enable expanding capacity and improving quality of transport services 11. Automatic pricing method for petroleum · Transparency in action, · Reduce losses in institutions and drain on budgetary resources · Permit to pass on the benefits of decreasing oil prices in the international market to consumers 12. Improve management of state banks · Ensure viability of banks and avoid massive burden on government · Increase efficiency of financial sector · Help reduce interest rates in the market 13. Public enterprise restructuring · Improve efficiency of the state sector · Reduce burden on the government budget · Make public enterprises financially viable · Improve quality of their products/services and enable the expansion of capacities 14. Labour market reforms · Increase employment opportunities · Improve the efficiency of the labour force · Increase labour mobility thereby enabling employers to hire the best employees 15. Gradually phasing out NSL and increasing dependency on GST · NSL has cascading effect (i.e. tax on a tax) while GST does not. Therefore, by replacing NSL with GST we could remove the cascading effect from the tax system
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