CB chief sees negative fallouts from IMF deal

ECONOMYNEXT – Central Bank governor Nivard Cabraal said seeking International Monetary Fund (IMF) help to resolve a debt and forex crisis would lead to currency depreciation and sharply higher interest rates, trimming the public sector and privatization of state enterprises.

However several policy corrections, which are usually in IMF deals are already done, he said.

Sri Lanka has been downgraded to CCC by rating agencies indicating higher risk of default as the country printed money to keep rates in a “monetary stimulus” on top of “fiscal stimulus” and lost foreign reserves as the printed money was exchanged for dollar reserves to maintain the exchange rate.

Ministers of President Gotabaya Rajapaksa’s ruling SLPP coalition has discussed the possibility of the government seeking IMF assistance to resolve the external crisis as it became more difficult to import oil and other goods.

The party had come to power slamming the last administration for going to the IMF, which led to tax hikes.

“If we want, there is no problem going for the IMF. We had gone in 2009. So nobody should think that we hesitate or fear to go,” Cabraal said at a news briefing on Thursday.

“The IMF could tell us to depreciate the rupee, raise the interest rates by 30 percent, 40 percent, 50 percent further, reduce the number of government sector employees, reduce or curtail pension benefits, and sell various state assets.

“These are some conditions they include in their reform agenda.

“Our view is that we do not need that reform agenda at this juncture. Our view is that without going for that, we can pay back our creditors. Though we see some pressure during this time, we know that will ease in the time ahead.”

The last IMF program failed to impose sufficient controls on the central bank giving it enough room to print money under discretionary flexible inflation targeting and triggered a second currency crisis in 2018 within the program leading to an output shock.

It also failed to impose spending controls on the Treasury ‘under so-called revenue based fiscal consolidation’ sans ‘spending based consolidation’ leading to steep rise in government spending and an increase in state sector pension entitlements.

The currency fall which usually comes a under an IMF program leads to a fall in real wages, a consumption fall, higher unemployment and an economic slowdown – the inevitable consequence of monetary and fiscal excesses – which leads to unhappy voters if elections come before growth recovers.

Cabraal, however, said Sri Lanka itself has been already doing what the IMF might prescribe in a policy package.

“The issue is we need to face the debt problem,” Cabraal said. “The main reason for the debt problem is 6.9 billion US dollars had been borrowed as loans via sovereign bonds to this country from 2018 April to 2019 June. Those loans have put a lot of pressure on the country’s debt.”

“So we have decided to do away with that kind of borrowing and reduce them while using some other borrowing methods. That is what we are doing right now. This will be the same advice the IMF will give us. No other advice they will give.”

“Debt restructuring is basically you change from one instrument to another. This has been done with a deep thought and scientific manner. Since we are already doing it, we do not need external help to do that.”

He also said the government has already taken decisions to change maximum retail prices of commodities.

“In some instances, we have removed them which could be told by the IMF.”

The budget for 2022 had already frozen recruitment raised taxes on companies including turnover based taxes and there were no salary hike for state workers except for striking teachers.

However any IMF programme now is likely to require the float of the currency as a prior action to restore foreign exchange markets.