IMF says will continue to work with government on economic reforms

• Says would not speculate on implications of the Local Government poll results on the economic decision making of the central government

By Chandeepa Wettasinghe

Despite speculation in local spheres being high over the government’s future economic decisions in the aftermath of the shocking Local Government polls drubbing, the International Monetary Fund (IMF) this week said that it is continuing to work with the government on the reforms the global lender of last resort had prescribed for the island nation.“With regard to the current Extended Fund Facility programme with Sri Lanka more specifically, I would like to stress that the Fund remains fully engaged with the authorities as they continue to implement the IMF-supported economic reform programme to make growth more sustainable and inclusive,” IMF Spokesperson Raphael Anspach said. Speaking to Mirror Business, he said that the IMF would not like to speculate on the implications of the local government poll results on the economic decision making of the central government.

The IMF was responding with regard to a question raised on what the government’s reaction would be in maintaining fiscal discipline in response to the polls, and whether the government had indicated that it would not move ahead with the cost reflective pricing formulae for fuel and electricity.

Central Bank Governor Dr. Indrajit Coomaraswamy recently said there is no scope for fiscal indiscipline for the government, and that drastic expenditure increases may even result in Sri Lanka not being able to fully meet its debt service obligations. Both Dr. Coomaraswamy, and Institute of Policy Studies Chairman Prof. Razeen Sally have called on the government to continue their reform efforts and deliver results, instead of resorting to populist fiscal policies. Key reforms to be introduced under the IMF Extended Fund Facility include the cost reflective pricing formula for fuel in March, and a similar formula for electricity in September to bring state-owned suppliers out of loss-making territory. Both formulae were originally supposed to be in place by December 2016.

However, given the current upward trend of oil prices, with the price of a barrel now trading at around US$ 70 compared to even less than US$ 30 in 2016, the Sri Lankan government has to absorb even greater losses when subsidizing fuel and electricity if the formulae are not introduced.

These subsidies have resulted in the Treasury guaranteeing loans taken by the state-owned Ceylon Electricity Board and the Ceylon Petroleum Corporation. 

The IMF had in the past said that Sri Lanka remains highly vulnerable to a debt shock arising from these contingent liabilities until the two reforms are fully implemented by September 2018, due to the delays in implementing them.  

The international lender had said that the country’s debt stock would increase to 94 percent of gross domestic product from the current 80 percent if the country receives this debt shock.

However, introducing the cost reflective mechanisms would result in consumers having to pay higher prices in the current scenario, where the coalition central government is becoming unpopular in the eyes of the public.

The government slashed fuel prices in January 2015, when the global prices were US$40-50 per barrel, and the leading party in the coalition government had campaigned for the recent local government elections with commercials that reminded the citizens of the price cuts.