Sri Lanka's excessive spending is epitomized by a 110-plus set of ministers. From the 1980s the people have also been oppressed by an iniquitous taxation regime where the rulers and state workers are exempted from income tax on their salaries and pensions.
Under an IMF deal in July, a ceiling was put on domestic borrowing to leave some money for the people, especially private entrepreneurs to use, and for interest rates to come down so that the ordinary citizen's economic activity can pick up.
The fiscal target was set as a 305.0 billion rupee local borrowing (net domestic financing) limit. The government has also said that it would keep to an overall budget deficit of 7.0 percent of gross domestic product, which is widely viewed as 'optimistic'.
The IMF said the government had requested a waiver of the net domestic financing target (NDF) of the government, which it had granted.
The December local borrowing target has been revised up to 342.2 billion rupees from a 331.8 billion tentative original target.
The central bank had kept its own money supply below the target and exceeded by more than 400 million US dollars, a foreign reserve target that had itself been revised upwards by more than 1.6 billion US dollars.
IMF documents showed that the target was revised upward by 1.6 billion US dollars to 3,105 million US dollars as foreign investments flowed into the Treasuries market due to high local interest rates and US monetary loosening.
But the revised estimate of foreign reserves by the end of October had reached 3,555 million US dollars.
Sri Lanka's total foreign reserves are now nearing 5.0 billion US dollars, the Central Bank governor Nivard Cabraal said before the 413 million US dollar IMF tranche was released.
The Central Bank has kept inflation at low levels allowing monetary policy to be looser.
Sri Lanka, which runs a peg with the US dollar, has 'imported' loose US monetary policy with hundreds of millions of dollars flooding into treasuries markets, with substantially higher policy rates kept by a cautious monetary authority.
The Central Bank has kept its 'repo' policy rate at which money is drained from the banking system at 8.0 percent and the 'reverse repo' rate at which money is printed at 10.5 percent.
But with excess liquidity coming from foreign exchange purchases, the effective policy rate has been the repo in recent months.
"There is scope for a further cautious easing of monetary policy in view of low inflation, weak credit growth, and below-potential output,"IMF's deputy managing director Takatoshi Kato said in a statement.
He also called for greater 'exchange rate flexibility', siding with exporters who had said past inflation created by the Central Bank had made Sri Lanka's rupee overvalued.
"The approach to accumulating reserves remains appropriate, and reserves are currently at more comfortable levels," Kato said.
"Fundamental external adjustment is still necessary, including through greater exchange rate flexibility.
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