I.M.F. on Monday disbursed the third and fourth tranches totallingU.S.$ 407.8 million under its U.S.$ 2.4 billion standby arrangement (s.b.a.)-S.D.R. 1.7 billion or 400% of Sri Lanka’s quota, on the eve of the presentation of Budget 2010 in parliament on Tuesday.
The I.M.F. made this announcement in a press release, which however was not sent to The Sunday Leader then, but which was subsequently received the following day, Wednesday.
Last year it released two equal tranches of U.S.$ 325 million each under the programme before suspending it due to Government of Sri Lanka’s (G.o.S.L.’s) fiscal profligacy.
But since then G.o.S.L. has increased taxes on various food commodities to try to bridge the revenue deficit, whilst allowing the market to determine prices of other items such as cooking gas and milk powder, which has apparently received I.M.F.’s nod of approval.
Soon after the April 8 General Elections, G.o.S.L. run Sathosa retail outlet increased the price of a large tin of Salmon by Rs. 16, from Rs. 149 to Rs. 165; the price of a 400 gram pack of milk powder by Rs. 19, price of local potatoes retailed in Sathosa outlets increased from Rs. 116 to Rs. 118 a kilo and due to the imposition of import taxes, bombay onions retailed in Sathosa outlets increased by Rs. 16, from Rs. 63 to Rs. 79 a kg.; a kg. of sugar by Rs. 5, from Rs. 79.50 to Rs. 84.50; dried sprats by Rs. 5, from Rs. 275 to Rs. 280 a kg.; wheat flour by Rs. 10.50 a kg. (as a result of which certain bakeries have jacked up the price of an ordinary loaf of bread by Rs. 5, from Rs. 40 to Rs. 45); cigarettes, up by Rs. 1 a stick; liquor, up by Rs. 50 a litre; a 750 millilitre bottle of beer up by Rs. 10; a 12.5 kg. cooking gas cylinder marketed by L.A.U.G.F.S. up by Rs. 323 to Rs. 1,744 and the same marketed by Shell, up by Rs. 219 to Rs. 1,769. As a consolation, Sathosa reduced the price of a kg. of chick peas by Rs 4 to Rs. 38; Samba rice by Rs. 3.50 to to Rs. 59.50 a kg.; red rice by Rs. 5, from Rs. 47 to Rs. 42 a kg.; white rice by Rs. 4, from Rs. 42 to Rs. 38 a kg.; red split lentils by Rs. 10, from Rs. 149 to Rs. 139 a kg. and garlic by Rs. 8, from Rs. 298 to Rs. 290 a kg. I.M.F. in their release further said that the Executive Board also approved a request by the Sri Lankan authorities for a one-year extension of the s.b.a.
Accordingly a rephasing of the future disbursements into seven equal amounts of S.D.R. 137.8 million (about US$203.9 million) in light of the recent delay in the programme has taken place. Following the Executive Board’s discussion on Sri Lanka, Deputy Managing Director and Acting Chair Naoyuki Shinohara said: “Overall economic conditions in Sri Lanka are improving and the economy is likely to show strong growth this year. Inflation remains subdued and average inflation for the year as a whole is expected to remain in single digits.
External balances are strong, remittance inflows continue at a high rate, tourism prospects are strengthening rapidly and gross reserves are at comfortable levels. Monetary conditions are stable. Interest rates have declined and credit growth has shown signs of recovering. The central bank’s policy stance remains appropriate, although there may be need to tighten it if credit and inflationary pressures pick up sharply. The central bank has intervened in the foreign exchange market to rebuild reserves, and has allowed the exchange rate to trade within a recently widened, although still narrow band.
Financial sector reform is in line with the programme and has substantially addressed the regulatory weaknesses. The authorities’ reform agenda has been broadened to include the introduction of a deposit insurance scheme, regulation of pension funds, and steps to deepen capital markets. Despite the weaker-than-programmed 2009 fiscal performance, the government’s 2010 budget proposal, if carried out, would significantly address past fiscal slippages, mainly through comprehensive tax reforms and sizeable cuts in recurrent spending. At the same time, the budget would allow for much needed reconstruction-related infrastructure investment, while protecting the society’s most vulnerable and addressing the humanitarian needs of those adversely affected by the conflict. The authorities’ efforts to reform trade and excise taxes and B.o.I. tax concession regime are a signal that they recognize the importance of a broader tax base and higher revenue in achieving the programme’s original goals of fundamental and sustainable reduction of the deficit and the public debt.
These efforts should be followed by important steps to permanently reform tax concessions and broaden the VAT and income tax bases to be introduced as part of the 2011 budget. “To promote private investment and growth, the authorities plan to formulate a national investment strategy, which will include reforms aimed at reducing the currently high cost of doing business in Sri Lanka.”
Business Editor’s Note: The Government, based on a pricing formula, on Wednesday reduced the price of a cylinder of Shell gas by Rs. 85 to to Rs. 1,659 and that of LAUGFS by Rs. 117 to Rs. 1,652.
I.M.F. defended the Government’s decision to impose trade taxes.
I.M.F. Resident Representative Dr. Koshy Mathai told reporters on Tuesday that when there was no import tax on wheat flour, even those who could afford benefited.
The Government recently imposed a Rs. 10.50 tax on a kilo of wheat flour which resulted in the price of an ordinary loaf of bread going up by Rs. 5, from Rs 40 to Rs. 45.
When it was pointed out that it was the poor who suffer most from such taxes, particularly in the context that one of the I.M.F.’s mandates was to ensure that the vulnerable in society are protected, Mathai said that what was therefore needed was proper subsidy targeting.
He however said that it was not easy to do this.
On allegations by the opposition that budget 2010, before it was presented to parliament on Tuesday was sent to the I.M.F. for approval, he said that that allegation was not true.
“Other than a broad discussion, it did not go into specifics” said Mathai.
The temporary suspension of the programme was proof that the I.M.F. did not have a hand in the budget, he added.
But when it was pointed out that the very revival of the programme was proof that the budget was an I.M.F. creation, Mathai disproved of that charge.
He also defended the Central Bank’s stance of having the Repo window and open market operations on simultaneously, saying central banks world over do it.
This was despite the fact that there was a 50 basis points difference between both of these in the local context (see also business editorial).
He asked is there in fact excess liquidity in the market? Mathai is also the I.M.F. representative to the Maldives. Is the I.M.F. also poking its fingers in Central Bank affairs?
Mathai further said that stable exchange and interest rates and inflation were sine qua non for growth and the economy was moving towards that direction.
He was happy with the rationalization of the B.o.I. tax regime in the budget and said that those should be targeted at growing industries such as tourism. Rationalization of recurrent expenditure, no cuts in capital expenditure and plans to increase revenue were positive indicators in the budget, said Mathai.