Tuesday, April 3, 2012

$ 400 m IMF lifeline for struggling Sri Lanka

Sri Lanka is to get a $ 400 million lifeline following what is anticipated as a favourable decision on the part of the International Monetary Fund (IMF).

 The IMF Board was scheduled to meet Monday evening Washington Time, and its Resident Representative Koshy Mathai is scheduled to hold a briefing today in Colombo at 2.00 p.m.

Speculation was rife within official circles and financial markets that Sri Lanka will receive approximately $ 400 million from the remaining $ 800 million under the Stand By Arrangement (SBA).

 The balance funds are expected after a fresh review which will be final before the program ends.  The previous timeline for the end was end-May 2012.

 Analysts said that in recent months, and especially during the past few weeks, the Government collectively has been burning the mid-night oil to improve its fiscal and monetary management in order to qualify for IMF assistance.

 With reserves under tremendous pressure despite Government assurances, the Opposition and other analysts have insisted that a mini-IMF bailout was critical at this juncture.

 Under the July 2009-approved $ 2.6 billion SBA, there had been eight reviews and seven tranches released to the tune of $ 1.7 billion. The last tranche of $ 218 million was released exactly a year ago. When that boost came in Sri Lanka’s reserves were $ 7.2 billion which was enough to meet 6.3 months of imports, though in January this year the strength had diminished to buy only three to four months of imports.

However from-mid last year the economic management of President Mahinda Rajapaksa Government had been off-track due to a multitude of reasons which led to IMF funds being withheld. Undeterred Central Bank remained upbeat it could steer the reserves and the economy from hitting a near-crisis level. The deterioration of the reserves and its fallout on the economy, exchange rate, interest rate and inflation saw sweeping measures from November 2011 onwards with the presentation of 2012 Budget by President Rajapaksa.

 The expectation of fresh release of funds from IMF comes after the Government originally implied it could do well without it. As recently as a fortnight ago Treasury Secretary Dr. P.B.  Jayasundera told media that IMF support wasn’t a concern and if comes through it will be a bonus.

 He also assured that serious loss of reserves has been arrested. However on Saturday, Treasury effected what some described as a mini-Budget raising taxes on high-growth import of vehicles.

  Reason cited was to reduce imports, save fuel and ease traffic on the roads. However a degree of desperation to boost revenue was evident from that move as well as hiking taxes on liquor and tobacco.

 When the fuel prices were revised upwards in an unprecedented manner in January, the Government was confident that the demand for vehicle imports will reduce. The Saturday’s revision in taxes proved that the Government wasn’t fully convinced with its own stand. These moves were in addition to a near 15% depreciation of the rupee, which also makes imports more expensive as well as curbs on bank lending.

 It was in this context that analysts described Saturday’s mini-Budget as sheer desperate move by the Government whilst the Opposition said it was to qualify for IMF assistance, a view which the Treasury denied subsequently.

 IMF money will stabilise rupee – Basil

 Economic Development Minister Basil Rajapaksa yesterday had said the rupee will stabilise once the IMF money comes in to the island nation’s $59 billion economy.

“Some people are holding dollar conversions and I think they will bring them when they see the stability. The stability level will be a price suitable for importers, exporters and Government,” Rajapaksa told reporters, without elaborating, the Reuters reported.

 The rupee edged down on Monday on last-minute importer dollar demand for the upcoming new year season, and as traders shrugged off an expected $400 million inflow from the International Monetary Fund’s latest release of a loan tranche.

 The rupee weakened to 128.25/128.30 a dollar from Friday’s close of 128.10/128.30, in light trade with low dollar sales by exporters ahead of the April festival season. The currency has risen 2.6% since it hit a record low of 131.60 on March 19.

 But it has fallen 10.9% since the central bank stopped defending it on Feb. 9.
 The IMF on Friday said it will consider making a $400 million disbursement on Monday and the final $400 million tranche of a $2.6 billion loan a few months later.

 Analysts expect depreciation pressure to remain in the medium to longer term until the country sees stronger export revenues.

 The central bank on Friday said that more than $500 million in investment is expected over the next few weeks, after the country received $164.2 million of inflows into the stock market and $400 million into Government securities in the first quarter.

 A hike in motor vehicle import taxes by the Government pulled the stock market 0.4% or 21.50 points down to 5,398.70 to a one-week low with the motor sector index falling 8.11%.

 The new tax policy also pulled down shares of India’s Bajaj Auto, which account for 10% of overall sales in Sri Lanka, by 1.4%.

 The day’s turnover was 694.6 million Sri Lanka rupees ($5.42 million), well below this year’s daily average of 1.35 billion. Foreign investors were net buyers of 34.4 million.

 The Colombo bourse is one of the worst performers this year among Asian markets, with a 11.1% loss.

source - www.ft.lk

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