Govt. urged to negotiate fresh loan facility with IMF

• Economists say that will help rebuild investor confidence and prevent sharp fall in rupee
• Estimate SL would require a US $ 2.5bn to US $ 3bn loan facility
• Point out SL could engage IMF for a fresh funding line via Rapid Funding Instrument 
• Say decisive leadership also should be extended to addressing concerns on economic stability 

By Nishel Fernando
Sri Lanka should engage with the International Monetary Fund (IMF) and explore other debt inflows to the country to retain the investor confidence on the economy as the selling rate of the US dollar crossed Rs.200 for the first time in the country’s history, leading economists in the country urge the government. 

The selling rate of the US dollar hit Rs.200.46 yesterday while the buying rate reached Rs.193.95, as the LKR continued to slide against the US dollar and other major foreign currencies, according to the Central Bank data. 
Speaking to Mirror Business, JB Securities Managing Director Murtaza Jafferjee, who is an economist, stressed that the government must act now to negotiate a fresh IMF programme to stabilise the economy, which has been adversely hit by the coronavirus (COVID-19) pandemic. 

According to the Central Bank, during the year up to April 3, the Sri Lankan rupee had depreciated by 4.9 percent against the US dollar, which now has reached 6 percent. 

The external sector in particular has been hit by the pandemic, with export revenue, remittance inflows, tourism revenue and FDI inflows, slowing down drastically.  

Jafferjee estimated that Sri Lanka would require a US $ 2.5 to US $ 3 billion IMF loan facility to stabilise the economy and rebuild the investor confidence. 

Commenting on the possibility of a fresh IMF programme, Ceylon Chamber of Commerce Chief Economist Shiran Fernando said Sri Lanka could engage with the IMF for a fresh funding line through the Rapid Funding Instrument (RFI).

Further, he mooted possible debt moratoriums, foreign currency swap lines and other potential bilateral debt inflows, to reassure confidence on the economy. 

“Weakness in LKR could be sentiment-driven right now with the concerns on the economy owing to COVID-19. To prevent a slide further, we may need to see measures that will reassure confidence, such as announcements on potential debt moratoriums, foreign currency swap lines and potentially other bilateral debt inflows,” he said. 

Fernando pointed out these measures possibly could negate the earnings losses from exports and tourism, due to the virus.

Meanwhile, Jafferjee stressed that decisive leadership should not only be limited to security and health matters but it should also be extended to address the concerns on the stability of the economy. 

“Decisive leadership is needed in economic matters, not only in security and health matters. It’s also about giving bad news. We have to swallow the pride and do what’s right for the country,” he said.

Further, he cautioned that the government must act to manage the expectations of all stakeholders in the economy, through carefully crafted messaging.

He pointed out that the recent policy decisions to ban non-essential imports to the country while suspending the purchase of Sri Lanka international sovereign bonds (ISBs) by the licensed banks and relaxation of foreign exchange rules to attract foreign inflows without any review process, have created excessive panic among investors.

“Recent announcements have disastrous implications,” he stressed. 

Following these announcements, Jafferjee noted that the foreign investors rushed to sell off Sri Lanka’s ISBs at double-digit rates to the face value in the secondary market, on Tuesday, which was one of the largest sell offs seen in recent times.

In particular, he was critical of the relaxation of foreign exchange laws to attract foreign inflows, which he cautioned that it may lead to the international terror financing and money laundering watchdog, the Financial Action Task Force (FATF), taking actions against Sri Lanka. 

With the engagement with the IMF, he was hopeful that the country would be able to raise funds from international capital markets at reasonable rates, when the market stabilises to service external debt, including the settlement of US $ 1 billion ISB scheduled to expire in October. 

Although the IMF is likely to show more leniency than usual, he noted that the multilateral lender is most likely to push Sri Lanka to rebuild its tax base, which he predicted would fall below 10 percent of GDP this year, amid the sweeping tax cuts announced late last year and the COVID-19 pandemic.

Hence, Jafferjee urged the government to put forward the country and to focus on stabilising the economy, instead of focusing on the upcoming parliamentary elections.

“If the government takes the right measures despite short-term consequences, the people will vote for them,” he said.