NEXT ECONOMY – Central Bank Governor Nivard Cabraal said seeking help from the International Monetary Fund (IMF) to resolve a debt and currency crisis would lead to currency depreciation and significantly higher interest rates, reducing the public sector and privatizing state enterprises.
However, several policy corrections, which are usually found in IMF agreements, are already being made, he said.
Sri Lanka was demoted to CCC by rating agencies indicating a higher risk of default as the country printed money to keep rates in a “monetary stimulus” in addition to “fiscal stimulus” and lost foreign exchange reserves because the printed money was exchanged for dollar reserves to maintain the exchange rate.
Ministers of President Gotabaya Rajapaksa’s ruling SLPP coalition discussed the possibility of the government seeking IMF assistance in resolving the external crisis as it became more difficult to import oil and other goods.
The party came to power blaming the last administration for going to the IMF, which led to tax hikes.
“If we want, there is no problem for the IMF. We had been there in 2009. So no one should think we are hesitant or afraid to go, ”Cabraal said at a press conference Thursday.
“The IMF could tell us to depreciate the rupee, raise interest rates by 30%, 40%, 50% more, reduce the number of public sector employees, reduce or reduce pension benefits and sell various state assets.
“These are conditions that they include in their reform program.
“Our point of view is that we don’t need this reform program at this point. Our point of view is that without going, we can repay our creditors. While we see some pressure during this time, we know it will ease in time to come. “
The latest IMF program failed to impose sufficient controls on the central bank, which gave it enough leeway to print money under flexible and discretionary inflation targeting and triggered a second monetary crisis in 2018 within the program, causing a production shock.
It also failed to impose spending controls on the treasury “as part of a so-called income-based fiscal consolidation” without “expenditure-based consolidation”, resulting in a sharp increase in government spending. and an increase in public sector pension rights.
The decline in the currency that usually results from an IMF program leads to lower real wages, lower consumption, higher unemployment and an economic slowdown – the inevitable consequence of monetary and budget excesses – which leads to voters unhappy if elections are held before growth resumes. .
Cabraal, however, said Sri Lanka itself has already done what the IMF might prescribe in a set of policies.
“The problem is we have to deal with the debt problem,” Cabraal said. “The main reason for the debt problem is that US $ 6.9 billion was borrowed in the form of loans via sovereign bonds from this country from April 2018 to June 2019. These loans put a lot of pressure on the country. the country’s debt.
“So we decided to eliminate this type of borrowing and reduce it while using other methods of borrowing. This is what we are doing now. It will be the same advice the IMF will give us. No further advice they will give.
“Debt restructuring is essentially about switching from one instrument to another. It was done with deep thought and in a scientific way. As we already do, we don’t need outside help to do it.
He also said the government has already taken decisions to change the maximum retail prices of commodities.
“In some cases we have removed them, which could be indicated by the IMF.”
The budget for 2022 had already frozen recruiting, increased corporate taxes, including turnover taxes, and there had been no salary increases for civil servants except for teachers on strike.
However, any IMF program will likely require currency float as a prior action to restore currency markets.