Sri Lanka forex reserve target missed due to Iran repayment

Feb 03, 2011 (LBO) – Sri Lanka missed a foreign reserve target set in a deal with the International Monetary Fund due to an early repayment of a loan to Iran, IMF resident representative Koshy Mathai said.

The government itself has no capacity to generate foreign exchange, except by borrowing and indebting future generations. Exports are done by the people and remittances are also sent by people who work abroad.

But when state agencies import oil, getting suppliers’ credit from abroad and selling the oil for immediate cash to the people allows the state to get a temporary cash float to fund its deficit outside the budget.

The state can also raise foreign exchange during a period of unsustainable peg defence by getting credit from abroad.

He said a seven month credit facility from Iran to import oil was reduced to four months reduced to four months in late 2010.

“As a result there was a bunching of oil import payments towards the end of last year,” Mathai told reporters.

“Because they (the government) had to repay those liabilities upfront it was difficult to meet the NIR target.”

IMF defines reserves as ‘net international reserves’ or NIR, which discards reserve increas