The staff level agreement with the International Monetary Fund (IMF) to being entitled to a loan assistance of US $ 2.9 billion should be instrumental in recovering Sri Lanka from the economic crisis befallen it and debt restructuring, emphasised Dhananath Fernando, calling in a briefing today (01).

The economic guru pointed out that with this staff level-agreement, it may be possible to obtain assistance from other countries and international bodies, advising that this should be the last time in which the island nation should seek support from the IMF given the record of six times being successful in seeking support out of sixteen attempts.

Fernando noted that the credit facility yet to be received is not enough to import fuel for a year, but the country can obtain what he described as a ‘good character certificate’ through the staff-level agreement with the IMF. Accordingly, Sri Lanka should take this opportunity to rebuild the country’s economy in the event that the IMF has paid attention on about seven aspects of granting assistance, he added.

These aspects include, autonomy of the Central Bank, protection of the poor, building foreign reserves, stabilisation of the financial and banking system, imposing regulations to stop corruption, and etc.

MIAP

Poorly-Directed Freebies May Have Adverse Economic Impact. Sri Lanka Best Example: Experts

Poorly-directed freebies may wreak havoc with state finances and have adverse consequences on the economy, as in the case of Sri Lanka, experts say.

New Delhi:

Poorly-directed freebies may wreak havoc with state finances and have adverse consequences on the economy, as in the case of Sri Lanka, experts say while noting it is important to define a freebie and how it is different from welfare expenditure.

Recently, the Supreme Court said freebies at the cost of taxpayers’ money might push the country towards imminent bankruptcy.

Economic think tank ICRIER Chairman Pramod Bhasin said, “Most freebies (unless at a time of huge urgency such as COVID) which are often poorly directed are a fiscal mistake with significant adverse consequences. And these exist in most states and under most forms of governments.” Bhasin noted that “political compulsions” cause most politicians to announce freebies as their way of capturing votes.

“If there were a way to limiting these within each state and also centrally, that would be a welcome move—but that is also for the elected representative to decide,” he said, adding that there is a need to define a freebie and how it is different from welfare expenditure.

Echoing similar views, Institute for Studies in Industrial Development (ISID) Director Nagesh Kumar said state governments need to be responsible regarding fiscal management unless they wish to get into an unsustainable situation.

“Basically, freebies given by state governments can wreak havoc with state finances. As demonstrated in Sri Lanka’s case, fiscal profligacy always leads to disaster,” Kumar said. 

Vice Chancellor of BR Ambedkar School of Economics (BASE)N R Bhanumurthy said any policy intervention that does not ensure net addition to production and productivity in the medium term to long term may be treated as a ‘freebie’.

” …it is important to define what a freebie is and how it differs from welfare expenditures. If introduced, such policies (freebies) could only accentuate the already worsening public debt situation in many states and create perverse incentives and intergenerational friction,” Bhanumurthy said.

On India’s current macroeconomic situation,  Bhasin said amid fear of recession all over the globe, India seems relatively far better placed, calmer and far more stable.

“Of course, India faces its share of downside risks. With spiralling energy prices and the forecast of lower GDP growth at 6.1 per cent (for 2023 as per IMF), we will, of course, see an impact,” he said, adding that relative to the rest of the world, India is in a much better position to weather this storm.

According to Bhasin, there has also been an outflow of investments from India. Still, against that, the Indian rupee has depreciated only moderately compared to other G20 countries, sometimes by half the amount versus Europe and the UK.

He said that India’s foreign exchange reserves are more than adequate in terms of sound macroeconomic perspective,” In fact, India has done remarkably well to manage through these times at a time when we would be considered very vulnerable to global shocks.” Bhanumurthy opined that India is absolutely in a better position than many of the advanced economies and has zero probability of getting into recession.

“Our outlook suggests that India should continue to be one of the fastest growing large economies with growth between 6.5 to 7 per cent in the current year,” he said, adding that in terms of downside risks, clearly, there are no domestic factors.

He said only the external factors could pose some downside pressures on the Indian economy.

“However, the domestic fundamentals are strong enough to cope with such external risks, ” Bhanumurthy opined.

According to Kumar, with its robust macro fundamentals, acceleration of industrial growth (IIP) in the past few months, and prospects of a good or normal monsoon, the Indian economy is expected to grow at 7-7.5 per cent in 2022-23, which will make it the fastest growing major economy in the world.

“Key risks to the growth outlook are posed by possible volatility of oil prices against the backdrop of the Ukraine-Russia war, and further worsening of the pandemic requiring lockdowns,” he said.

Kumar said another headwind for India is arising from the hardening interest rates in the US as the Fed is unwinding the easy money policy rather aggressively.

“Yet I do not think that a repeat of the 2013-14 type of situation (taper-tantrum) is likely, given the sizeable forex reserves of around $570 billion,” he asserted. 

NDTV

Two suspects remanded in connection with the assassination of a group of people including former Minister Jeyaraj Fernandopulle have been acquitted today (01) as per the order of the Gampaha High Court.

The two, ex LTTE militant Selvarajah Kirubakaran and former Assistant Police Superintendent Senarath Lakshman Cooray, accordingly, have been acquitted of all charges.

16 persons including Mr. Fernandopulle were killed and 84 injured in a suicide bomb attack near Weliveriya Kanthi Stadium on the morning of April 06, 2008.

The Attorney General lodged the case in the Gampaha High Court under 31 charges including murder of 16 persons, attempted murder 84 persons and plotting for murder.

MIAP

Sri Lanka and the International Monetary Fund (IMF) have reached a preliminary agreement on an emergency loan and a formal announcement will be made today after the successful conclusion of a week-long discussions between IMF and local official teams, official sources said.

The island nation, struggling with its worst economic crisis in more than seven decades, had sought up to $3 billion from the IMF.

Staff-level agreements are typically subject to the approval of the IMF management and its executive board, after which the recipient nations get access to funds.

A visiting IMF team held talks with President Ranil Wickreamasinghe, opposition leader Sajith Premadasa Sri Lankan government officials, including the treasury secretary, late into the night on Tuesday to address concerns on the political front, the sources said. Most of the technical details had been agreed beforehand.

The International Monetary Board team arrived in the island on Wednesday 24 to finalize discussions and to reach Staff-Level Agreement which will lead to to gain IMF Board Approval and unlock loan package including additional much-needed multilateral financings ,official sources said.

Sri Lanka is to continue engagement with creditors in order to obtain financing assurances although debt restructuring plan, which is crucial to reaching the eagerly awaited agreement with the IMF, is yet to be finalized.

A staff-level agreement would be an important milestone towards the IMF Board approval for the EFF programme, which in turn would help unlock bridging finance to support the much-needed external financing for Sri Lanka,” the Finance Ministry said.

The ministry shared that the Sri Lankan authorities are working with debt restructuring advisor Lazard and Clifford Chance to reach a consensus on debt restructuring arrangements with the creditors.

“The advisors have already prepared the analytical framework for the debt operation, prior to formal engagements with Sri Lanka’s creditors,” the ministry said.

The statement highlighted that the government is committed to engaging its creditors in good faith, with a view to reaching a comprehensive debt restructuring programme that provides a fair and sustainable outcome for all stakeholders.
According to Central Bank Governor Dr. Nandalal Weerasinghe ,the International Monetary Fund’s disbursement of the Extended Fund Facility to Sri Lanka can be expected by the end of the year, subject to the success of debt restructuring with creditors and successful negotiations with the IMF.

“First part is to reach a staff-level agreement on the overall macro fiscal policy framework for the next 3-4 years and the medium-term framework, that we are coming closer to reaching an agreement on a macro fiscal framework,”he disclosed.

“The second part is for us to agree and negotiate with the debt targets for us to make our medium to long term debt sustainable. We are in the process of having this discussion. Only after that basically we can say where the debt targets we have to meet.”

He said that after ending discussions with the IMF and reach that agreemen,t then only they will approach the creditors,”.

Once we reach the staff-level agreement, then the timeline is set. Then we have to approach all our external creditors and start negotiating and discussing in good faith for us to obtain a relief on the debt service payments, he added.

“It is essential to get ‘financial assurance’ from Sri Lanka’s external creditors he said adding that CB thinks next about 3-4 months, hopefully if all goes well, if all external creditors are cooperating with the Sri Lankan government’s debt management strategy, then hoping that we would be able to get financial assurance somewhere is December.

This will be the requirement for IMF to allow the Central Bank to submit its paper to the executive board enabling them for disbursing the Extended Fund Facility of Around US $ 3 billion in tranches commencing from towards the end of this year, he claimed.

Update:

The Asian Development Bank (ADB) approved a US $200 million emergency assistance loan for Sri Lanka, with funds repurposed from other ongoing ADB projects, to improve food security and protect the livelihoods of the poor and vulnerable, especially women and children.

“Food insecurity has severely affected the people of Sri Lanka amid the current economic difficulties. This assistance will expand direct financial support for the poor and vulnerable, boost livelihood development activities and agricultural production, and enhance social protection systems,” said ADB Senior Education Specialist for South Asia Asako Maruyama.

He added that “This fulfills the government’s request for a partial cancellation of loan proceeds from ongoing projects and to use the funds for this emergency intervention.”

The project will continue, for at least 3 months, the temporary increase in the monthly cash grant amount and the number of beneficiaries of the existing social assistance programs, including the Samurdhi subsidy program for low-income families, and allowances for the elderly, persons with disabilities, and kidney disease patients.

It will also support, for at least 3 months, a temporary increase in the monthly value of food vouchers for pregnant and lactating women to be replaced with cash grants, and extend support to undernourished children under the age of 2.

To increase food production and offset increasing agricultural production costs, the project will provide financial support for a maximum of 2 hectares of land cultivated by each farmer in higher-yield zones during the upcoming cultivation season. Moreover, upgraded livelihood development programs for low-income families will be supported in selected districts over 18–20 months to restore livelihoods and enhance coping capacity and food security.

The project will also upgrade information technology systems and digital tools for the Samurdhi program and agriculture and agrarian development to enhance cash grant beneficiary selection, verification, monitoring, and communication, and improve financial, advisory, and other services for low-income families and farmers.

In addition, ADB will administer a $3 million grant from the Japan Fund for Prosperous and Resilient Asia and the Pacific to support basic needs, such as food, hygiene kits, and medicines, of vulnerable women, children, elders, and persons with disabilities in shelters and care homes and those at risk of being placed in institutional care.

It will strengthen referral and support mechanisms for victims of gender-based and domestic violence. To promote advanced practices and technologies for precision agriculture and improved crop productivity among farmers, it will support the upgrading and delivery of the Good Agricultural Practices certification program.

ADB is committed to achieving a prosperous, inclusive, resilient, and sustainable Asia and the Pacific, while sustaining its efforts to eradicate extreme poverty. Established in 1966, it is owned by 68 members—49 from the region.