Jan 19, 2009 (LBO) – Sri Lanka’s central bank said it would not apply for an International Monetary Fund (IMF) bailout or devalue the currency but would seek other means to shore up the island’s dwindling foreign reserves.
A typical IMF package involves a clean float of the currency to stop further sterilized intervention and to allow a devaluation large enough to off-set pent up demand pressure built up by liquidity injections, during the period of peg-defence.
IMF also gives some money direct to the central bank to shore up its reserves, for confidence building purposes, which has little real effect on the domestic market.
In a floating exchange regime, foreign reserves are irrelevant. But analysts say in Sri Lanka, where authorities have long resorted to foreign reserves to avoid sovereign default, the fiscal implications of low reserves were extremely serious.
An IMF package is also accompanied by World Bank loans to boost government finance which stops the need for additional money printing, and also improves dollar liquidity in the forex market.
Such moneys are ‘conditional’ on general fiscal and monetary tightening to address the root causes of the currency crisis.
These include halt