Abstract
This paper assesses Sri Lanka’s First and Second Reviews Under the Stand-By Arrangement (SBA) and Requests for Waiver of Performance Criterion and for Extension of the Arrangement. The program supported by the current SBA approved in April 2001 achieved its initial objective of halting reserve losses. However, political and economic developments complicated economic policymaking during the second half of 2001 and led to a hiatus in the SBA. Despite the risks, the government’s strong commitment to prudent financial policies, and the actions taken to initiate key structural reforms, merit continued IMF support.
1. This statement provides an update on recent economic developments and financing issues since the staff report was issued on April 1 (EBS/02/59). The information contained in this statement does not alter the analysis or the appraisal in the staff report.
2. The 2002 budget, which was approved by Parliament today, is in line with the program framework. Because of technical complications, the new VAT will become effective from July 1, a delay of one month.
3. The latest consumer price data show that the trend of inflation continues to decline. While the Colombo Consumers’ Price Index (CCPI) increased by about ½ percent in March, the Colombo District Consumer Price Index (CDCPI), which covers a wider geographical area and has more current weights, declined by about ¾ percent. Both indices continue to show a gradual deceleration on an annual average basis. The decline in inflation is closely related to the decline in food prices, reflecting a gradual improvement in supply conditions.
4. The latest information on gross official reserves indicates that the level has been stable since late March. As of April 8, gross official reserves (expressed in market prices) amounted to about $1.2 billion. The rupee is currently trading at Rs 95.8/$l and has slightly depreciated against the dollar and other trading partner currencies since late March 2002.
5. The monetary policy stance continues to be tight. The data on reserve money at end-March suggest that the program’s end-April reserve money target is likely to be observed. The Central Bank of Sri Lanka raised its key overnight reverse repo rate by 20 basis points to 13.85 percent on April 4, in response to an increase in banks’ demand for funds from the reverse repurchase window ahead of the mid-April Sinhala and Tamil new year festival. Other rates have also increased slightly—for the week ending April 5, the 3-month treasury bill yield was 12.9 percent, compared with 12.7 percent at late March, while the prime lending rate was 14.0 percent, compared with 13.6 percent at late March.
6. On financing issues, the authorities and the World Bank staff have reached broad agreement on the policy framework for the Private Sector Development (PSD) credit. The program loans from the AsDB are also broadly on track. While a few details of the $130 million PSD credit have not yet been completely finalized, it is expected that the Bank’s Operations Committee would discuss an Initiating Memorandum in May. An appraisal mission is scheduled for June and the first tranche of the PSD credit (at least 50 percent) could be released by the third quarter of 2002. Although the SBA-supported program itself, which runs through mid-August, is fully financed, the timing of disbursement of the PSD credit would affect the post-program balance of payments prospects. Any financing gap for 2002 arising from a delay into 2003 of the remaining PSD credit disbursements could be filled by a combination of further policy adjustment and additional financing from other sources.
7. The program assumes the current WEO oil price projection of $23 per barrel for 2002. However, if the recent increase in oil prices continues, it could add additional pressure on the balance of payments.