The IMF cautions Sri Lanka on foreign borrowings at high rates

The International Monetary Fund has cautioned Sri Lanka on foreign borrowings at high rates in the face of flat budget revenues and relatively low growth.

Todd Schneider, a top official of IMF told a media conference in Colombo last week that new external borrowings should be done with a close eye to sustainability stressing the need to ensure that investments generate the resources to service these financial obligations .He predicted that the economy would grow by 6.5 percent this year with uncertainty over whether the first half momentum could be maintained for the rest of the year

He stressed that it will be essential to adhere to the flexible exchange rate regime that has been a core component of the policy framework since early 2012 and to limit the intervention to dealing with excessive short-term volatility

An IMF staff mission led by Mr. Schneider visited Colombo during September 1725 to conduct Post-Program Monitoring discussions as part of a routine enhanced surveillance for countries which have had "exceptional access" to IMF resources, as is the case for Sri Lanka, which last year successfully completed a US$ 2.6 billion IMF program.

The mission met with government and central bank officials, as well as civil society and private sector representatives.

Mr. Schneider noted that while the rupee has been relatively resilient so far, the balance of external risks for Sri Lanka has shifted to the downside.

He emphasised that it will be essential to adhere to the flexible exchange rate regime that has been a core component of the policy framework since early 2012 and to limit the intervention to dealing with excessive short-term volatility.

Contingency plans-including a mix of fiscal and monetary policies to counter potential market pressures- should be prepared in anticipation of possible shifts in market conditions, he added.

The current account defi- cit narrowed in the first half of 2013, and the balance of payments surplus is expected to widen this year. Nonperforming loans have risen somewhat, but the financial system remains relatively strong, he revealed.

Considering the risks Sri Lanka is facing, Mr Schneider suggested that policy rates remain on hold to give time to assess the impact of recent easing.

He pointed out that weak revenues on the fiscal side remain a serious challenge and suggested to give priority to reverse the downward trend through reducing exemptions, broadening the tax base (particularly for direct taxes), and strengthening tax administration and compliance.

"Efforts to boost growth should focus on structural measures, such as tariff reform, enhanced revenue mobilization to support capital expenditure, and improvements in the general business climate," he said.

A discussion on Post Program Monitoring on Sri Lanka by the IMF's Executive Board is expected to take place in late November.