Sri Lanka puts a three month moratorium on short term interest rates

Sri Lanka opts not to tinker with its key short-term interest rates for the next three months as authorities plan to tame galloping inflation during the second half of this year, Treasury Secretary said. Sri Lanka opts not to tinker with its key short-term interest rates for the next three months as authorities plan to tame galloping inflation during the second half of this year, Treasury Secretary said. Short term interest rates have remained at 7.5 percent for the third consecutive month, though inflation continues to head north. February inflation raced to 15.9 percent, while last year’s trade deficit had also widened to US$ 2.2 bn, according to Sri Lanka’s Central Bank.

Private economists expect inflation to rise further in the coming months as subsidies on flour, water and transport were removed this month. The economy is still feeling the pinch from the last price hikes in fuel, electricity, gas and transport

Jayasundara who sits on the five member monetary board says, the market should not expect any changes when the next monetary policy statement emerges on March 16.

“Inflation is rising due to large credit expansion from public investments…we have removed the subsidy from flour, which will save us Rs. 6 bn (US$ 600 mn) this year, and corrected anomalies for bus fares,” he said addressing a Central Bank seminar late Wednesday.

Sri Lanka, he says, is banking on donor funds to curb excessive government borrowing, which is needed for post-tsunami reconstruction work. “We need to keep our domestic borrowing down and donor funds should help us with it….for that we need to keep interest rates at this level for the next three months,” he said.

The tsunami killed over 30,000 people, left thousands homeless and knocked off key infrastructure along the southern and eastern coastlines.

The government estimates US$ 1.8 bn is needed over the next three to five years, of which US$ 500 mn is needed this year.

But despite a lot of international goodwill, the pledging has not crystalised into hard cash and Sri Lanka has so far got less than 10 percent of its emergency aid requirement todate, Jayasundara lamented.

The Central Bank said recently that US$ 600 mn has come through the local banking system by way of private donations.

Jayasundara says the government itself has coughed out US$ 150 mn out of its 2005 budget, to meet urgent needs.

“There is a perception that the government is basically corrupt,” he said giving possible reasons as to why money has not trickled into government coffers.

Police on Wednesday arrested a senior commissioner in the Trincomalee District Office for siphoning off 12 Indian-gifted electricity generators meant to be used by tsunami.

Much of the donor driven projects, he says, are trapped in lengthy procurement procedures or lost in government bureaucracy.

“There is an urgent need to re-visit donor programmes and embark on a sustainable strategy,” he said.

In the meantime, Sri Lanka has taken up Paris Club and G7’s – a group of wealthy donor countries – offer for debt relief.

“Rescheduling debts over a three to five year period, provides a US$ 350 mn buffer zone, reducing the need to depend on the domestic market. It will also improve macro imbalances in the system,” he explains.

Even the International Monetary Fund is not picking up US$ 113.5 mn interest payments due this year. The Washington based Fund’s board will meet on Friday to take up Sri Lanka’s request for US$ 160 mn in emergency assistance.

“Aid pledges by donors have been impressive but commitments for 2005 still need to be firmed up,” the IMF said in a report assessing the post tsunami economic impact on Sri Lanka.

Jayasundara is upbeat that the economy will grow by 6.0 percent this year, though the island’s Central Bank has cut growth to 5.5 percent. The IMF kept GDP at 4.0 percent for 2005.

However, the IMF report points out that growth forecast will be off target if donor funds don’t materialise and any shortfall could have negative impact on the economy.

A drop in donor funds poses a problem for Sri Lanka’s balance of payments, creating high inflation, putting pressure on precious foreign currency reserves.

“Even with significant aid flows and IMF financial assistance, the external and fiscal positions are expected to remain vulnerable,” the IMF said. “The authorities will be hard pressed to keep international reserves at the pre-tsunami level of about US$ 1.9 bn.”

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