New arrangement with the IMF

Sri Lankan authorities are considering a possible arrangement with the International Monetary Fund (IMF) where the balance dues from the US$2.6 billion facility could be drawn at a later stage, officials said.

While the Central Bank is most likely to opt for a surveillance agreement with the IMF which is standard practice after a programme is over and as a follow up arrangement, an option being considered is a ‘commitment fee’ arrangement. “Under such a programme, the Central Bank pays a commitment fee to the fund to hold the balance of $800 million for a period of time and then draw this amount later,” a senior bank official, who declined to be named, said, adding, “we then can decide either to draw this money or not.” An IMF team led by Sri Lanka mission leader Brian Atkin is due tomorrow on a week-long review mission aimed at finalizing the last two installments of the fund facility approved in July 2009 as balance of payments support. The Central Bank, the executing agency of the facility, has so far drawn $1.8 billion from the $2.6 billion with another $800 million due. “The final draw-down of $800 million will be at a higher rate of interest – over 3 % compared to 1.1/4 % from the amount received so far - because we received 400 % of Sri Lanka’s quota in the IMF when each country is generally entitled to 300% of their quota,” the official noted. He said whenever a country’s quota is exceeded the interest rate goes up and in this context, one question arises, “should we get credit at a highest cost since our foreign reserves are at a comfortable level?” He said this would be one of the key issues discussed during meetings with the IMF team. The official said Sri Lanka’s reserves are comfortable at the moment at over $6 billion as against an average 3 ½ months (worth $4-5 billion) that is generally required. “We need to take a call whether we actually need to draw the final installments at a higher cost when we have enough reserves,” he said. Other sources in the banking industry said with interest rates mixed internationally, recycling these reserves to earn a better return instead of keeping the funds idle is also not an economically, viable proposition. Some economists and Opposition MPS like economist Harsha de Silva have been critical of the Central Bank and its policies relating to accumulation of foreign reserves through bonds while other sources are foreign remittances and IMF funds. There has been wide criticism of the Bank’s use of some $1billion to support a sagging Rupee and keep it steady against the dollar. In the 2012 budget, the Government announced a 3 % devaluation much to the surprise of the Central Bank which has been resisting any devaluation and has been adjusting the Rupee in a marginal way through open market operations.