25 April, 2019

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Making Sense Of IMF Credit Facility

By Sirimevan Colombage

Prof. Sirimevan Colombage

Prof. Sirimevan Colombage

The landmark credit facility approved by the International Monetary Fund (IMF) early this month is not only a relief to ease the country’s severe external payments imbalance but also an opportunity to jump-start the long-overdue economic reforms. The facility amounting to US $ 1.5 billion comes under the Fund’s Extended Fund Facility (EFF). This three-year arrangement aims to meet balance of payments needs arising from the weakening external finance situation and pressures that may persist during the adjustment period.

Correcting economic misalignments

The arrangement is a signal to global capital markets that the government is keen on economic recovery. It thereby enhances investor confidence and provides the necessary support to execute the reforms.

Hence, it is the utmost responsibility of the government to ensure strict adherence to the reform agenda so as to rectify the prolonged macroeconomic misalignments. In the past, many such programs did not succeed due to the then governments’ failure to implement bold reforms for political reasons. The adverse effects of such negligence still haunt the economy. The success of the present program too will depend on the commitment on the part of the government.

The reform package along with the market-responsive exchange rate and interest rate systems which are now in place would facilitate rectifying the economic disarrays.

Confidence booster

Some critics argue that the IMF facility is hardly sufficient to meet the country’s external payments commitments which run to the tune of over $ 5 billion for the next 12 months. But the point is the program with the IMF has wider implications than its financial assistance per se. It is more a confidence booster giving positive signals to global investors that investment climate is going to be improved through structural adjustments under the stipulated reform agenda.

Strong focus on structural reforms

The EFF has been designed to provide assistance to countries experiencing severe payments imbalances due to structural impediments, or to countries characterized by slow growth and an inherently weak balance of payments position. The EFF provides assistance in support of comprehensive programs that include policies required to correct structural imbalances over an extended period. Given the longer time needed to correct deep-rooted structural weaknesses, the implementation of EFF and its repayment period are longer than most other Fund arrangements.

When a country borrows from the IMF, it commits to undertake policies to overcome its economic and structural problems. Under an EFF, these commitments, including specific conditionality, usually have a strong focus on structural reforms to address institutional or economic weaknesses, in addition to policies that maintain macroeconomic stability. The IMF assesses the program performance regularly allowing to readjust it depending on economic changes.

Objectives and pillars of Sri Lanka’s EFF

The key objectives of the current EFF program are to (a) implement a structural increase in revenues to reduce the fiscal deficit, (b) reverse the decline in central bank foreign exchange reserves, (c) reduce public debt relative to GDP and lower the country risk of debt distress, and (d) enhance public financial management and improve the operations of state owned enterprises. The program also aims to transition toward inflation targeting with a flexible exchange rate regime and to promote sustainable and inclusive economic growth by supporting trade and investment.

In order to achieve the objectives, the program envisages implementation of a set of reforms under six pillars – (a) fiscal consolidation, (b) revenue mobilization, (c) public financial management reform, (d) state enterprise reform, (e) transition to flexible inflation targeting under a flexible exchange rate regime, and (f) reforms in the trade and investment regime.

Fiscal consolidation

Fiscal imbalances are the root cause of many economic ills including inflation, external payments deficits and debt burden. The program envisages to restore fiscal consolidation with a budget deficit goal of 3.5 percent of GDP by 2020. This is expected to be achieved by raising tax revenue from 11.8 percent of GDP in 2016 to 14.6 percent in 2020 while maintaining expenditure more or less around the same level of about 19 percent of GDP. This means that the entire burden of fiscal adjustment falls on tax mobilization.IMF

Revenue Mobilization

It is expected to raise revenue by broadening the base for income tax and VAT. Tax expenditures pertaining to tax holidays, tax exemptions and special tax rates offered to various entities are to be rationalized. Efficiency of tax administration will be improved by adopting key performance indicators, compliance strategies for VAT and income tax and new IT systems.

Reduction of the burden of indirect taxes which now account for about 80 percent of the total tax revenue is a major challenge for the government. Far-reaching reforms to expand the direct tax base are imperative for the purpose.

Public financial management reform

Improvement in expenditure management and fiscal risk monitoring is a key component of the reform package. A commitment control system based on commitment records and quarterly expenditure commitment ceilings is to be established by mid-2016. Summarized government fiscal operations are expected to be disseminated through quarterly financial bulletins.

State enterprise reform

Considering the heavy fiscal burden of loss-making state-owned enterprises, drastic reforms have become imperative. Financial discipline of the key enterprises are to be improved by adopting business strategies with corporate plans, financial and non-financial targets and financing plans. A formula-based automatic pricing mechanism will be introduced for petroleum products.

Enhancing monetary policy effectiveness

Prudent monetary policy management is essential to achieve price and economic stability. According to the program, monetary policy will focus on maintaining single-digit inflation, while moving towards a durable flexible exchange rate system. The program will also support the move toward flexible inflation targeting and financial deepening.IMF

The program envisages a reduction in bank credit to both the government and private sector with a view to facilitate price stability. The projected decline for 2016 and subsequent years seems too optimistic.

Supporting trade and investment

The program aims at boosting trade and private sector activities by reducing protectionism so as to improve competitiveness. The country’s trade regime including para-tariffs and non-tariff barriers are to be reviewed. The program also envisages greater integration into regional and global supply chains, higher FDI inflows and enhancing prospects for private sector investment.

Political commitment vital

Political economy has a profound influence on implementation of adjustment programs. Sri Lanka’s past experience reveals that factors such as lack of political cohesion, bureaucratic constraints and social unrest inhibited program implementation. Generally, the governments are unable to withstand the pressures coming from lobbying groups at the implementation stages of programs. Welfare expenditure cuts, tax increases and public enterprise reforms, for instance, are bitter pills which are not popularly acceptable.

The government needs to focus on sustainable macroeconomic balances with a long-term vision rather than seeking electoral popularity.

*Prof. Sirimevan Colombage is an economist, academic and former senior central banker, can be reached at sscolom@gmail.com

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Latest comments

  • 2
    2

    Why is Ranil so obsessed with BREXIT? Has he not heard of ASIAN ECONOMIES being increasingly DE-LINKED from the European Economy? Ranil and Mahendran are using BREXIT as an excuse to distract people from the massive economic crisis due to political corruption in Sri Lanka and of course Mahendran’s corruption for which he must be prosecuted.

    Why is Ranil so obsessed by a declining and breaking up Britain? Are there no more pressing problems such as tracing down the Billions stashed in off shore accounts by tax dogers revealed in the Panama Papers and other investigations and recovering the funds to pay off some of the gigantic NATIONAL DEBT OF SRI LANKA?

    The Central Bank needs to come up with the road map and strategy for this rather than BREXIT – which will not affect Asian economies very much despite the hype because Asia is the growth region of the world at this time.

    Rather than asking the Central Bank to map out a BREXIT strategy we need a strategy to address debt burden, and recover looted funds from Sri Lanka!

    • 3
      0

      IMF and western government are training Sri Lanka on all sorts of things including handling weapons of mass destruction, but no one is training Sri Lankans on CORRUPTION PREVENTION and tracking down funds looted from the country and kept in off shore bank accounts..

      This is where the culpability of IMF is legalizing financial corruption, massive economic inevequality and trickle up policies to make the rich richer is clear.

      This is a silly article. This so called Professor of what should read Jeffry Sacks on the Panama Papers and the role of IMF, WOrld Bank and UK in financial fraud.

      • 0
        0

        Quite Rights Dude Dinuk!
        Am still laughing on the way to my off shore bank account!

        Thomas Picketty and Sacks have written about Tax Havens in a letter to David Camaron’s Anti corruption (ha, ha ha,) conference in London last month, in the Guardian – an article that Colomba needs to read to educate himself about the REAL global ECONOMY and the REAL global financial system.. rather than spinning IMF and World Bank fiction!

        https://www.theguardian.com/world/2016/may/09/tax-havens-have-no-economic-justification-say-top-economists

        This guy Colombage must have been paid off or got a small consultancy from IMF in Colombo!

      • 0
        0

        Sri Lanka will soon be in a Greece-like debt trap with social and economic ruin for the people – this is how IMF helps!

        This so-called Professor JOKER needs to go back to kindergarten!

  • 3
    2

    If Ranil is not careful he will face Rexit

  • 3
    0

    Prof Colombage writes in favour of IMF loans, more of it!

    He must belong to the 0.0001 of the decent human population not bent on others’ blood sucking who are in that particular camp.

    We have also heard that blod suckers like the IMF look after those who support their money lending well! No aspersions are cast but… Ha… Haa.

  • 0
    1

    [Edited out] – why PM is worried about Brexit is clear when you see the stastistics. Srilanken exports are double the size to UK when compared to that of India. Even if it is 1/3 of the size of exports to the states, we are directly being met with any changes being made to that country.

    Main export partners
    United States 21.8%
    United Kingdom 8.3%
    India 4.5%
    Germany 4.2% (2013 est.)[6]

    Just beasue the god gave a healthy brain, if you would abuse it not thinking twice, you guys would only stay lying and creating new hatred among the grass eating majority folks. Arjuna mahendran has been made a fool by lanken media – that is stupid victimization.
    Even that DEW Gunasekara s cesspit allows to do so. In clear text, he has not done anything wrong, but the sums that are calculated as disardavantages or losses can be made to anyone in every country.

  • 2
    2

    We are paying the price for trying to hood wink the IMF by successive governments not implementing the agreed programs
    . Economic policy measures should made depending on fundamentals and not to suit political agendas. Exchange rate and interest rates were manipulated to win elections by the previous regime and now we are paying the price.

    • 1
      0

      This “boru singhe”‘s opinion will not be accepted by poor Sri Lankans.
      The poor in our country and the rest of the world are becoming poorer and hungrier due to the IMF extracting their labour in the from of interest on loans.

      It is part of their trickery to blame the politicians for the situation, after dictating the politicians as to how to run the economy.

      Boru singhes should be slayed!

  • 1
    0

    THE WHOLE ISSUE FOR THE CURRENT SITUATION ARE THE PROMISES MADE PRIOR ELECTION FOR THE INCREASE OF GOVERNMENT EMPLOYEES SALARY,PRICE REDUCTION OF MANY ITEMS ETC.SALARY INCREASE ALONG COSTS OVER RS 150 BILLION
    ABOUT 30% OF VOTERS ARE HARD BLUE ANOTHER 30% ARE HARD GREEN, LEAVING 10%, THE BALANCE 30% ARE ILLITERATE FOOLS WHO SWALLOW THE PROMISES.NOW LET US FACE IT.THE POLITICAL PROMISES MADE THIS TIME IS THE LARGEST & NEVER BEFORE WILL BLAST THE ECONOMY AND THE COUNTRY. POLITICAL GUYS PRIOR GIVING THESE PROMISES AT LEAST SHOULD BE ABLE READ THE CENTRAL BANK REPORT.

    LAWS SHOULD BE BROUGHT TO PUNISH POLITICIANS WHO MAKE THIS IMPOSSIBLE PROMISES AND PLACING THE COUNTRY IN JEPORDY.SYSTEM OF PROVING TOO SHOULD BE BROUGHT UNDER THE LAW.

  • 1
    0

    If the governer is so clever why do they have to give the bonds to private sector primary dealers including perpetual treasuries when there are so much of funds available with EPF as a dealer to the benefit of the private sector employees without enriching green band and there treasuries As such it appears it is a fraud against the state.Further several years ago it was understood that perputual trasuries had requested ETF by letter to purchase their equity which the ETF Board fortunately turn down to the benefit of the members. These are very mean & coverdish acts of to make money along with other suckers who miserably failed .

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