Transcript of a Conference Call on Sri Lanka With Brian Aitken, Mission Chief for Sri Lanka of the IMF’s Asia and Pacific Department
July 27, 2009Washington, D.C.
Thursday, July 27, 2009
Ms. KAMATA: Good morning, everybody. I am Yoshiko Kamata of IMF Media Relations. Thank you very much for joining this morning’s conference call on Sri Lanka. As you know, we regularly host a press conference call like this following the Executive Board’s approval of an IMF program. Here with me is Mr. Brian Aitken, Mission Chief for Sri Lanka, and he will be happy to take your questions.
MR. AITKEN: As you all know, the Executive Board on Friday approved the 20-month standby arrangement for Sri Lanka. The amount was 1.65 billion SDRs which comes to about $2.6 billion. The first tranche of that loan of about $322 million was made available Friday following Board approval.
So I am happy to answer your questions. I think we have about 30 minutes? Okay, so I welcome your questions. Thank you.
QUESTIONER: I was wondering how the Fund has structured this loan to take into consideration the bigger position they were shown at the Board on Friday, which is the concerns regarding human rights --- but worry that a lot of this money is not going to go toward the North. Could you maybe answer that?
MR. AITKEN: Maybe I start with the second question. The IMF’s money does not directly fund the government’s budget efforts. It’s lent entirely to the central bank to rebuild reserves. So the hope, though, is that the loan provides a framework in which the other donors, the multilaterals and bilateral donors, can support the reconstruction effort directly.
On the first question, we’re aware of the human rights issues and the humanitarian situation. As a mission chief, and as any mission chief would, it’s my job to talk to a wide range of people and institutions beyond just the government. So I’m in regular contact with humanitarian organizations, embassies, etc..
But, in Sri Lanka’s case, they have been hit by the global crisis, and the IMF’s mandate is to address and ward off balance of payments crises. Now that’s the balance of payments crisis sounds rather dry, but it really would have a devastating impact on the economy and on the people, particularly the most vulnerable as we’ve seen in other countries. So our job, our mandate is to prevent such a crisis.
QUESTIONER: How quick would a turnaround be for Sri Lanka do you think? An economic turnaround?
MR. AITKEN: What we’re feeling now is that as the global crisis dissipates, Sri Lanka’s growth should rebound, and we’re expecting that to happen next year. In fact, it may already be happening with the end of the conflict.
QUESTIONER: Do you have growth estimates?
MR. AITKEN: As you know, the central bank has a growth estimate of 3 percent, which we agree with, but it could be higher than that. It’s really hard to determine at this stage.
QUESTIONER: Right. And, just to be clear, that’s for 2009?
MR. AITKEN: For 2009, yes.
QUESTIONER: I’m wondering on the program on the second year, it seems to -- (inaudible) -- depreciation between the rupee and the dollar. Might you have such a large depreciation -- (inaudible)?
MR. AITKEN: I’m sorry, it was a little hard to hear. But you’re asking whether the dollar-rupee rate, whether we expect it to change or is that?
QUESTIONER: Okay. Looking at the summary -- (inaudible) -- on the second year program, when you look at the nominal GDP in the rupees and the dollars, you see that -- (inaudible) -- to arrive at that number. (Inaudible) -- depreciating in the second year. Does that mean that you expect -- (inaudible) -- that you see the exchange rate depreciating?
MR. AITKEN: No, we don’t. We don’t have any. In these programs, we don’t target the exchange rate. We don’t have any specific exchange rate target or projection. So we can’t determine at this point what, how the exchange rate will move.
As you know, the program targets reserves. And, depending on the supply and demand for foreign exchange to meet those reserve targets, then the exchange rate will be the one factor that equilibrates the supply and demand, but the reserve targets are the foundation of the program.
QUESTIONER: Okay. I’m trying to get at this. Looking at the projection for the GDP number -- (inaudible) -- do you see a rupee exchange rate that has been devalued than now?
MR. AITKEN: I mean we have a technical nominal GDP. There are many factors that go into that. This is just a very indicative projection. So I wouldn’t place any weight on this. That’s not a target or anything. I would place very little weight on that.
MS. KAMATA: Here we also have a question from Sri Lanka. The question is: The original request was for U.S. $1.9 billion assistance, and why was the final amount different?
MR. AITKEN: When a country makes a request, we evaluate with the government, following the request, the needs of what the country specifically has in order for the program to be fully supported.
In Sri Lanka’s case, that was we determined that $2.6 billion, together with the government, was what was needed to support the program. That’s in line with other countries, but again, it’s very specifically targeted to Sri Lanka based on analysis that we conducted with the government.
MS. KAMATA: Thank you. We have one more question here. Is IMF planning to establish a mission [resident representative office] in Sri Lanka to monitor the implementation of the new program?
MR. AITKEN: It wouldn’t be uncommon. It’s currently under consideration.
QUESTIONER: This is with regard to the program. Basically, the IMF now supports public welfare missions, like spending on subsidies and so on. And does that mean that by supporting that, do you expect the government to increase its revenue, like its tax revenue, to reduce the budget deficit?
MR. AITKEN: The government’s program actually aims to reverse the decline in tax revenue which has taken place over the last several years. The main instrument, as mentioned in the letter of intent, is the government has currently set up a tax commission to review the entire framework with the idea of broadening the base and reducing exemptions. This, the government feels, is necessary both to reduce the budget deficit but also to finance, to provide the resources to pay for the government’s reconstruction needs to rehabilitate the North and the East.
QUESTIONER: But, still, the government continues with its handouts. The subsidy system is still on. Does the IMF believe that the public welfare mission should be curtailed to an extent or it should go on as it needs, while the government looks at other ways of maybe spending its funds, like expenditures, and increase its revenue through taxes?
MR. AITKEN: You’re referring to the subsidies that the government currently has in their budget?
QUESTIONER: (Inaudible) -- the expenditures that are incurred on these kind of funds, like the fertilizer subsidy. You know like those kinds of subsidies that amount to quite a lot of money. So does that mean that could continue like it is or should there be any sort of curtailment in those as well in order to reach -- (inaudible) -- deficit?
MR. AITKEN: I should be clear that it’s very important for the government’s program with the IMF support to protect social spending, particularly on health, education and transfers to the poor. We don’t have any specific conditions under the program because that’s not really our specialty or our focus. The government, however, as I understand, plans to increase somewhat social spending on health and education, and I believe that the government is trying to, as they state in their Memorandum of Economic Policies, intends to target some payments, transfers, better so that they can go to the people who need it most. So that is one of the reasons why the government feels that they need to raise revenue under their program.
QUESTIONER: I wanted to know the total number of countries who abstained from the vote and what those countries were?
MR. AITKEN: That’s an IMF Executive Board deliberation. As staff of the IMF, we’re not in a position to comment on the process in which the Board came to approve the IMF program.
QUESTIONER: So then I would need to contact someone else to find out which countries abstained, is that correct?
MR. AITKEN: If the Board members make that public, then you can contact them directly. I think you need to contact the governments directly because, again, this is the Executive Board’s deliberations which we don’t comment on.
QUESTIONER: You have mentioned about the flexible exchange rate and also the idea of the Sri Lankan government -- (inaudible) -- has mentioned about flexibility in its exchange rate. When does this --(inaudible) -- because we have seen when the currency tends to appreciate there has been preventing, and when it depreciates they sort of allow more depreciation gradually. Why does this flexible exchange rate mean?
MR. AITKEN: Again, the program is targeted to increase reserves, and the exchange rate under those circumstances needs to be flexible to respond to changes in the foreign exchange flowing into the country. So the exchange rate needs to be flexible in order for the program’s reserve targets to be met.
Now what that means in terms of appreciation or depreciation of the exchange rate, we don’t know at this point. It will have to be what is necessary for the government to meet its reserve target.
We can’t have a program that targets both the exchange rate and the reserves. So, in this case, we’ve chosen to target a buildup in reserves.
QUESTIONER: One more question, the government says that it targets the buildup of reserves -- (inaudible) -- when the whole 20-month ends. Do you have any quarterly targets for these reserve targets?
MR. AITKEN: In the memorandum of understanding, which is published on the central bank web site, there is a table of targets for each program review period. So I would just refer you to that table.
QUESTIONER: How much additional financing do you think is going to be needed for Sri Lanka from from other donors and multilateral banks? Is there an estimate on that?
MR. AITKEN: At the moment, there’s a fair amount of financing already in the pipeline for project-related loans. The ADB[Asian Development Bank] has money targeted for budget support co-financed by the Japanese.
Now how much is needed depends on how ambitious and how quickly the government can move on its reconstruction program. I think their intention is --once they have a much more specific program, their intention is to approach the bilateral-multilateral donors to help finance this program. If the government has the capacity to implement this program quickly, then it will need the support, more support from the donor community.
QUESTIONER: Could I just ask you on the recovery? When you look at the reserve targets, I mean when could you see the reserve targets?
I mean how quickly could reserves be built up and what are the futures of that? I mean what does that depend on? Surely, the global recovery would be part of that.
MR. AITKEN: Certainly, a global recovery would clearly help boost Sri Lanka’s exports, and that would help rebuild [reserves]. That would go directly towards rebuilding the reserves.
Now how quickly? The IMF has global economic projections that expect recovery towards the end of this year, beginning of next. That would feed directly into our projections of Sri Lanka’s exports. So the rate at which they build up reserves would certainly depend on the speed of the global recovery.
QUESTIONER: Not inter-regional trade or anything to that effect?
MR. AITKEN: Most of Sri Lanka’s exports are the bulk of it is garments that are mostly exported to the United States and Europe. Regional trade is less important for Sri Lanka.
QUESTIONER: My question is now Sri Lanka made this request for an IMF loan for very much, and it was delayed until last week.
My second question is the endorsement by the IMF of $2.6 billion -- is that the IMF has endorsed the Sri Lankan government’s economic policies are in better shape, I mean in good shape?
Thirdly, what do you think about the end of the war? Will it help Sri Lanka? I mean how it will benefit the economic recovery?
MR. AITKEN: On the first one, Sri Lanka approached the IMF in March and the loan was approved on Friday. First, I should mention some programs take many months after the request. Some are approved quickly; some take several months. So this is not unusual.
In this case, as we’ve said before, the importance or what’s required for loan approval is not simply an agreement with the government and the staff of the IMF, but it also involves the support of the IMF Board which represents the international community. But, again, I would stress that this is not unusual.
QUESTIONER: My second question is how the Central Bank of Sri Lanka just now said this is an IMF approval of $2.6 billion and it’s a direct endorsement by the IMF recognizing the government’s economic policies. Is that true?
MR. AITKEN: The government’s program is quite ambitious in addressing the problems, the root causes that created the vulnerabilities for the economy. We feel that it’s a strong program. We feel that the government is committed to implementing it, and we also believe that if they do implement it, it would put Sri Lanka on a much stronger basis and lay the basis for much higher growth in the future in addressing the post-conflict reconstruction needs.
Now the IMF Board would not have endorsed this program if we did not feel like the government has the desire and the capacity to implement it.
Regarding your last question, the end of the conflict will certainly have a positive impact on Sri Lanka’s growth. We would expect there to be higher foreign direct investment. We would expect there to be an increase in and opening up in a way of areas that were under the conflict in the North. And the government, as they being their reconstruction program there, I think that would lay the infrastructure for much higher growth. So, yes, I think the end of the conflict is good news for the Sri Lankan economy.
QUESTIONER: Do you think the global economic recovery will start from Asia, or is it again from the U.S. increase in demand or how do you enlighten that?
MR. AITKEN: Well, that’s a bit broader than Sri Lanka specifically. But, as I mentioned, the global recovery that we would expect in both Asia and in the United States and Europe will benefit Sri Lanka, particularly their exports of garments to the U.S. and to Europe which has been Sri Lanka’s main export. We would also expect that it should have a positive impact on remittances to Sri Lanka from Sri Lankan workers overseas.
MS. KAMATA: We are going to wrap up. So let us take a last question.
OPERATOR: There are no more questions at this time.
MS. KAMATA: Okay, then let us wrap up. And thank you very much again for joining us.
MR. AITKEN: Thank you.