By Shihar Aneez
COLOMBO, Feb 12 : Sri Lanka is in initial talks with the IMF about a loan, Finance Minister Ravi Karunanayake said today, amid concerns over pressures on its balance of payments, outflows from government bonds and a ballooning fiscal deficit.
Higher foreign debt repayments and the central bank’s heavy intervention to prop up a falling rupee have depleted Sri Lanka’s reserves by around a third to 6.3 billion dollars, as of January 31, since they peaked in October 2014.
“We have started the initial discussion. Now they will come at the end of March,” Karunanayake told Reuters.
“Their main concerns were usual budget deficit, over-estimated revenue, and under estimated cost.” He said Sri Lanka has not given any proposals to the International Monetary Fund and no decision has been made about the size of the loan.
IMF spokesman Gerry Rice said Sri Lanka was interested in an IMF-supported programme as one option to address pressures on its external financing.
“We are considering the options and that will depend on our assessment of macroeconomic vulnerabilities, the nature and the size of balance-of-payments needs and government policies to address those vulnerabilities,” he told reporters in Washington.
The global lender last week urged Sri Lanka to reduce its fiscal deficit and raise tax revenues.
Facing a lack of dollar inflows, President Maithripala Sirisena’s government has resorted to measures that include accepting dollar deposits from mystery investors and reviving financial ties with China, which chilled after Sirisena won elections a year ago.
Foreign investors have sold a net 174.4 billion rupees (1.21 billion dollars) of government bonds since Sirisena came to power. Selling was driven by concerns the US Federal Reserve would tighten policy, fears that were borne out when it hiked its ultra-low rates in December.
Sri Lanka’s fiscal deficit widened to 7.2 per cent of gross domestic product last year, from an original estimate of 4.4 per cent. The government forecasts a deficit of 5.9 per cent this year.
Sasha Riser-Kositsky of the Eurasia Group said Sri Lanka’s declining reserves and increasing external vulnerabilities concerned foreign investors.
“What the IMF would demand would be a much more conservative budget than we saw in 2016. It is going to be extremely hard,” he said. “The first and foremost is a major fiscal correction. That will presumably involve both raising taxes and controlling spending.” Kositsky said such decision would be extremely politically unpopular. But IMF backing would lift investor confidence, help address external challenges and buy time for fiscal adjustments.