IMF loan unavoidable says ADB

By Poornima Weerasekara

The Asian Development Bank (ADB) yesterday described Sri Lanka’s decision to opt for a US$ 1.9 billion IMF assistance as ‘unavoidable’ but urged the Government to relax the hold on the exchange rate.
ADB said IMF funding would help Sri Lanka to tackle its fiscal deficit and emphasised the need for the government to allow more flexibility in its exchange rate management policy. “The Sri Lankan government has taken several steps to meet its external funding needs. But only 10% have invested in the government treasury bills and bonds,” ADB Sri Lanka Mission’s lead economist Narhari Rao said.
“The decline in remittances would reduce its importance as an option to bridge the balance of payment deficit,” he added.
Although the fiscal deficit is expected to reduce to 7% in 2009 from 7.5% in 2008 due to a sharp decline in exports, the figure was cause for concern.
Rao added that there was a need to adopt a more flexible exchange rate management mechanism.s
“Low levels of foreign exchange reserves leaves very little room for the government to provide an adequate economic stimulus package,” he said.
He said that the current Rs. 16 billion stimulus package was less than 1% of the GDP, far below the IMF recommended 2% mark.
“Devaluing the rupee at this point will not harm export growth so much. Countries that have allowed the exchange rate to fluctuate with the marker have experienced several phases, but would eventually stabilise,” he said.
The ADB identified two development challenges for Sri Lanka in 2009. They include the need to broad base the manufacturing base and increase the contribution of the manufacturing sector to the GDP and to simplify the current tax regime.

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