Transcript of a Press Briefing on Sri Lanka by Koshy Mathai, IMF Resident Representative for Sri Lanka and Maldives
February 8, 2011By Koshy Mathai, IMF Resident Representative for Sri Lanka and Maldives
February 2, 2011
Colombo, Sri Lanka
MR. MATHAI: Thanks to all of you for coming. We called this press conference to announce what you may already know from our website, which is that our Executive Board met yesterday to consider the IMF's program with Sri Lanka and decided to complete the fifth review under the Stand-by Arrangement. With the completion of the fifth review will come the release of about $217 million in the next couple of days. That brings total disbursements under the IMF program to $1½ billion, since the middle of 2009.
As you know, the total size of the program is $2.6 billion, so we've got $1.1 billion remaining to be disbursed. That $1.1 billion will be spread across five tranches scheduled over the rest of this year and into the beginning of 2012. So we’ve just done the fifth review, and we should have five more reviews before the program ends.
You all have copies of the press release, which we issued on our website yesterday, and the Central Bank has issued its own press release as well, and you’ll find that on their website. Maybe I can give you a little bit of an introduction and then I'll open it up for whatever questions you may have.
One point I'd like to make up front is that in the press release you will see a mention of waivers—a waiver of nonobservance and a waiver of applicability—and I just want to clarify what exactly that jargon means. First, the Board granted a waiver of applicability for the net domestic financing performance criterion, which is our measure of government fiscal performance—that is, revenues and expenditures, and the deficit. And the government asked for a waiver of applicability not because the fiscal target was missed but rather because complete data are not available to evaluate whether the target was met or missed. Whatever data we have right now actually suggests that the target was met. In fact, according to our rules, a waiver of applicability cannot even be requested unless the existing evidence suggests that the target was met. So we think that the target was met, but we can't confirm that, and that is why the government has formally asked the Board to not consider that criterion in deciding on this review. It's essentially like a technicality.
The second one is a waiver of nonobservance of the performance criterion on net international reserves (NIR). That means that the target was actually missed and the government has asked that this be overlooked. But there’s a very good reason, and that's why we recommended that the waiver be granted. In our program we target a certain accumulation of net international reserves, but if debt service is higher than expected—if the government legitimately has higher-than-expected interest or amortization costs—we lower that net international reserve accumulation target. That's the way the program is designed, and we have this legal document called a Technical Memorandum of Understanding, TMU, that explains this and other adjustments to the targets.
The problem is that the TMU language was not sufficiently broad. It didn't cover the pay-down of certain types of debt service that happened to be paid down in this case. For instance, some liabilities related to oil shipments from Iran were paid down. There was a credit facility that used to be seven months long, and it ended up being reduced to four months credit facility, and as a result there was a bunching of oil import payments toward the end of last year. In making those payments, the government was essentially clearing liabilities that otherwise only would have had to be paid three months later. But because they had to pay those liabilities up front, it was difficult to meet their NIR target. To us that's very similar to the regular debt service adjustor that we already have in the program, and that's why we thought that it was entirely consistent with the spirit of the program to allow that adjustment this time. But because that hadn't been specified ex ante, we had to declare formally that they had missed the target and ask for a waiver, rather than just simply changing the measurement of it up front. This also seemed like not a major issue to us. I wanted to clarify these waivers at the beginning since I suspected that they could cause confusion.
Let me then say a couple of words about the general situation. As you know, there are always risks when one looks at an economy, and that's true here as well, but all in all we're pretty happy with what we are seeing in the Sri Lankan economy. The external position is much healthier than it used to be a couple of years ago. Reserves are up substantially, and yes, there are risks there…imports are rising; oil prices are rising; but at the same time we continue to predict that the balance of payments overall will be in surplus this year and that the reserve position will be all right.
The exchange rate has been stable. In fact, over the last few months we've seen some appreciation of the exchange rate, and we've been happy to see some movement, but as we've emphasized in our previous press releases, we would like to see movement in both directions—two-way flexibility of the exchange rate, in order to ensure that the competiveness of the economy is maintained over the medium term. Overall the external sector is certainly much healthier than it was before.
A second point is that inflation and monetary conditions are better and easier than they were before. Inflation of course has ticked up in recent months, and a large part of that as far as we can tell is supply shocks—international food prices rising, the effect of local flooding on vegetable prices, and other things like that. We don't see any signs that the economy is overheating, that demand in the economy is growing too fast and that the Central Bank needs to put on the brakes, to tighten monetary policy in order to combat that overgrowth of demand. No, that's not what we see. Rather, the underlying inflation trends seem to be under control. We're not seeing any bubble in the property market. Credit is picking up quite fast, but from a very low base. Overall we think that inflation and monetary conditions are all right and that the Central Bank's monetary policy stance is appropriate just now.
Of course, here too there are risks. A central bank must be ever-vigilant. We have to watch what happens with the property market. We need to watch what happens with inflation trends. Are we going to see current supply shocks to inflation feeding into second-round effects where wage demands start to increase and where inflationary expectations begin to become entrenched? We're not seeing it yet, but if it happens later the Central Bank would have to adjust.
In terms of real growth, the economy is certainly rebounding. We have seen a couple of quarters of very fast growth. We're expecting the economy to have grown by 7-1/2 percent in 2010 and by 7 percent in 2011.
Turning next to the fiscal situation, as you know, this has historically been a weak area for Sri Lanka. Sri Lanka has run large budget deficits and consequently has a large debt stock relative to GDP. But what we've seen recently is a remarkable improvement in government policies. We've seen the 2010 and 2011 budgets outlining a path for deficit reduction to 8 percent of GDP in 2010, 6¾ percent of GDP in 2011, and down to 5¼ in 2012. Our calculations indicate that such a deficit path—if they can maintain it—will be enough to deliver a debt ratio that declines quite nicely from the above-80-percent range, that it is in now, into the 60-percent range within 4 or 5 years. That all sounds good.
Of course, as with all policy intentions, they have to implement those policies. They have to make sure that the deficits stay in line with what they've forecast. One thing that we like about the budget is how they are planning to reduce the deficit—which is, in large part, through an increase in revenues. Sri Lanka stands out in international comparison for having very low revenues relative to GDP. They have now introduced in the budget a major tax reform, as you all know, that has many structural features that are appealing—simplification, making the system more equitable, easier to administer, broadening the base, reducing rates…all of these things are there. At the same time, they are aiming to raise revenue collections relative to GDP, which to us seems like a very sensible thing.
The second thing that they've done in the budget which we think is a good move is the Board of Investment (BOI) reform. Rather than having the BOI operating as a tax-concession-generating machine, the idea is now for the BOI to be repurposed as an investment-facilitation agency that would identify investors and make their lives easier when they get to the country. There would continue to be tax concessions, but they would be always either in the regular Inland Revenue Code or in the Strategic Investment Law, where broader concessions would be available but everything would be gazetted and everything would be subject to parliamentary approval. All of this sounds good, if implemented as announced.
Beyond reforms of the tax system and the BOI, there has been a lot of emphasis recently on improving the business environment here—raising Sri Lanka place in the global “doing-business” rankings—and that also seems like a very sensible thing to do.
A final point relates to the state enterprises. That also is a part of the fiscal picture, aside from just the central government deficit. If the state enterprises’ balances can be improved, that certainly will be a major contribution toward overall fiscal management, and the government has reiterated its commitment to putting the Ceylon Petroleum Corporation (CPC) and the Ceylon Electricity Board (CEB) into break-even status, on a combined basis, by the end of this year.
So all of this seems good. Maybe I'll add one last point on the financial sector. The financial sector had some stability issues in the past, and those have been addressed, and now the government is looking forward toward developing the financial sector in order to facilitate the flow of finance toward companies, so that growth can be enhanced. There has been emphasis on promoting IPOs so that more firms enter the stock market, so that it's a deeper market which provides more equity financing to companies. And also an emphasis on developing the corporate bond market, which is a very important point—first, an aim to extend the government yield curve as a benchmark for corporate bonds; second, changing the tax treatment of corporate bonds to make it easier for those bonds to be traded in the secondary market; and third, a relaxation of some exchange controls to allow foreign money to come into the corporate bond market, hoping that that would boost activity.
All in all, we're seeing a lot of good structural measures along with the good macro numbers that have been laid out in the budget, and it's in that general context that we were quite happy with the prospects here—always keeping in mind the risks, of course—and that was the reason why the Board decided to complete this last review. They've just completed the review yesterday, and money will be released soon. An IMF team is traveling here in the next couple of days, and they will start discussions for the next review—the sixth review—and then we'll have another press conference like this a few months from now. Let me stop there and take any questions you may have.
QUESTION: You said that they were off as far as NIR was concerned. What was the achievement, and by how much were they off, and what was your target?
MR. MATHAI: I don't have those precise figures with me right now, but when you get the Letter of Intent, which is on the website, you'll be able to see those numbers. There was a deviation, but as I said, it was more than explained by this pay-down of foreign-exchange liabilities, so we didn't view it as a problem.
QUESTION: So basically it’s the IMF’s ethos that when specific numbers are not met, if the spirit of the law is observed, you all are basically flexible, from a historical perspective?
MR. MATHAI: Well, I'm too young to talk about the historical perspective [laughs], but I'll tell you about our perspective now, which is that when we have got an agreement, there is no point simply being legalistic about it. We have to look at the spirit of things, and in this case, the understanding was that the Central Bank would continue to build up its reserves, and that it would maintain exchange-rate flexibility to do that—they've committed to doing that—but that if debt service needs emerge which were not envisaged before, that some adjustment would be made, and this was another sort of adjustment like that. It happened not to have been specifically laid out in the TMU, which is why we had to ask for a waiver, but essentially it's exactly the same as the routine sort of adjustment.
QUESTION: The Central Bank says their gross reserves are very high, something like $6.6 billion.
MR. MATHAI: Correct. They're very high.
QUESTION: Could you explain how it is that they didn’t meet their net international reserves target, in that context?
MR. MATHAI: The level is undoubtedly very high. But we have targets that they maintain and even increase those levels. We are not at all suggesting that there is any weakness to the position; rather, it's quite a strong position, but nonetheless, on a technical basis they did miss this target which is why this legal instrument of a waiver had to be requested.
QUESTION: Does that target include borrowed reserves as well, or is it without the borrowed reserves?
MR. MATHAI: What you're alluding to, if I can enlighten everybody else, who may not know, is that when we measure reserves, we don’t just look at the total figure; rather we make adjustments for any foreign borrowings, such as flows into the treasury bill market, floatation of the euro bond, etc.—we ratchet up our targets correspondingly and measure the net international reserves target on that basis.
QUESTION: What was the [level of] borrowed reserve[s]?
MR. MATHAI: That figure again I don't have, but it will be in the documents.
QUESTION: [inaudible]…basically based on export inflows and remittances? Those are the parameters?
MR. MATHAI: Yes, essentially. The concept that we have—I think you know this from the previous press conferences—is that we would like to focus on reserves that are generated through current-account adjustment, through growing exports and remittances, and not count on borrowing monies in order to meet reserve targets. Thankfully the government has not had to resort to that. There have been borrowed monies, but reserves have far exceeded any targets that we originally set. Originally we had a target of reaching net international reserves of $1¾ billion by the end of 2011 and now we're talking about reaching $4¼ billion by the end of 2011, so we are on a totally different plane in terms of reserves targets. We have far exceeded what we originally thought would be possible under the program.
QUESTION: On the growth pattern, this year you all expect 7 percent?
MR. MATHAI: Seven percent for 2011.
QUESTION: That means you are expecting growth to slow?
MR. MATHAI: That's right, but that's natural because 2009 after all was a recession year, and from that low base there was naturally a bounce, so that the growth in the following year was higher than normal from that low base. Things would settle down in 2011, when you are comparing to a more normal base, a more normal year of 2010. In any case, I think the difference between 7 and 7-1/2 is not very large in statistical terms [laughs]. We are kidding ourselves if we think that we know, or any economist knows, so precisely what a growth rate is going to be. Qualitatively they're both in the same 7- to 8-percent range, I would say. I think that's the humble way of looking at these projections.
QUESTION: If all goes well, the balance payments will be spread over equal tranches, is it?
MR. MATHAI: Correct. Following this will be five tranches of the same $210- to $220 million. The exact dollar amount is different each time as you know because we disburse in our Special Drawing Rights, SDRs—a basket of currencies—and insofar as cross-exchange rates move over time, the precise dollar amount may change.
QUESTION: And if all goes well, the final tranche will be in the first quarter of next year?
MR. MATHAI: That's correct.
QUESTION: Given the macroeconomic environment in the world that has emerged, especially with oil prices now somewhat high and also commodity prices in some of the countries, how confident are you that your figure of a 7percent growth rate by the industries here can be reached?
MR. MATHAI: I think you're quite right to point to risks. I started off the whole talk by saying there are risks in Sri Lanka, just as there are in all economies, and certainly if we have oil prices going to the $150 level that we had a few years back, that may have an impact on growth here and abroad. Currently we are not expecting that. We are expecting prices to rise but to stay at more moderate levels, so that is the sort of thing we'll have to address when we come to it.
QUESTION: What do you think would spur growth to the 7-percent level from the last year’s base, which had already grown at 8 percent from the year before that?
MR. MATHAI: I think the economy through a 30-year history has shown that 5 or 6 percent growth goes without saying. Five or 6 percent is almost the natural state of affairs in the Sri Lankan economy, which really is kind of a miraculous outturn given that war was going on during those years. I think if, during war years, an economy was able to grow at 5 percent or 6 percent, it seems perfectly natural that in a recovery phase, when options are completely open, when it's a new economic scenario altogether in Sri Lanka, and also for the world, with the world economy recovering and export prospects going up, it's quite reasonable that 7 percent should be achievable. Of course this is all conditional on macroeconomic stability’s being maintained, and I think a key part of that is making sure that fiscal policies remain on track.
QUESTION: Some economists say that for us to grow at those levels, investments have to be up, from 25 to 26 percent of GDP to the 40-percent level. That's going to be a tremendous jump. Do you think it’s realistic?
MR. MATHAI: I think that when they talk about those levels, they're talking about growth of 8 to 10 percent, not growth at the 7 percent level that we have got. You will notice that our growth projections are a little more conservative than the Central Bank's are. Again, I don't think there's a major difference in statistical terms. Statistically speaking, we are all in the same ballpark.
QUESTION: You differ by one percent.
MR. MATHAI: We are a little bit more conservative than other observers are, but investment does seem to be taking off. It has been slow so far. FDI has been very slow. And even now our projections have FDI going from about $375 million in 2010, growing to $725 million in 2011. That's a near doubling, but $725 million for an economy of Sri Lanka's size is still quite a low figure. Look at countries like Vietnam, where FDI is many times what it is in Sri Lanka. Clearly there is a lot of room to grow, and I think that's why the government has been focusing so much on all these things like the softer factors, improving the business environment, and why we also think that keeping the macroeconomic environment stable to attract those investors is going to be a key thing. Hopefully the tax reforms will play a role. I've asked many businessmen why it is that FDI has been slower to come in than some people would have expected, and I've not really received a very satisfactory answer from anybody. Some people have told me, “We have for 30 years operated in an age of diminished expectations. We never were able to think big because the war was going on, and it didn't pay for us to think about making major investments. Now it takes time to reorient to this new blank canvas that we have in front of us.” Maybe there is something to that. Maybe there is something to the fact that a lot had been promised in the budget, and people naturally would have been waiting for the budget. If I were an investor, I probably would not have plunked down $100 million in October. I probably would have waited until November and the aftermath of the budget to see what exactly the new environment would be.
Another point that people in the tourism industry have made to me is that you can only do major investments during the low season, so don't expect major hotel renovations to take place in December and January. Maybe those would occur on a seasonal basis a few months later. So there are a variety of reasons out there. I think the next 3 months / 6 months / 1 year will be absolutely critical. That really will be the test of whether FDI starts coming in.
QUESTION: You used the word miraculous related to growth. Can you elaborate? That's a strong word.
MR. MATHAI: I said what was miraculous was that the economy somehow was able to manage 5 to 6 percent growth during these past three decades. Coming at it as an outsider I would have expected that with the conflict that was absorbing so much in terms of human and financial resources, that naturally growth would have been far lower, but it wasn't.
QUESTION: Why do you think so?
MR. MATHAI: I think that really is a difficult question, and I'm not able to give you a proper answer, but I think it speaks to some fundamental strengths in the economy—a good labor force and other things, natural endowments, etc.. Hopefully they can capitalize on all of that going forward.
QUESTION: When these disbursements began in 2009, I think there were political and human-rights considerations before this all started. Are you measuring those kinds of factors, particularly things like human rights, as you go on with your disbursements?
MR. MATHAI: No, we are not.
QUESTION: Are you saying that Sri Lanka’s risk premium still is too high… (inaudible) we’re not seeing any real investment coming?
MR. MATHAI: No, I don't think I'm making any qualitative judgment like that. We can certainly say that during the financial crisis, risk premia on all of the emerging markets widened substantially. Sri Lanka's EMBIG (Emerging Markets Bond Index Global) spread went from about 400 basis points—meaning that Sri Lanka was borrowing at 4-percent more than the U.S. would through 10-year U.S. Treasurys—to 2,000 basis points, a full 20-percent more, and that widening wasn't peculiar to Sri Lanka. Many countries faced the same situation. Now those spreads have come absolutely down once again, corresponding with the inflows that have come in.
QUESTION: Sri Lanka doesn’t have a big manufacturing base—most of the investments in some of the other countries, they have huge manufacturing, and that attracts hard investment. Is that one of the reasons that we are not getting enough inflows?
MR. MATHAI: I think that could be a factor. I hadn't about it in those terms, but I think that doesn't necessarily mean that we need to go into manufacturing. I think that Sri Lanka needs to think about what its natural strengths are, and one thing that needs to be kept in consideration is the major transformation we’re seeing in the world economy. We used to have a world economy that was powered by the Western consumer—the U.S. consumer in particular—providing a lot of export demand for the rest of the world. Now we are finding the Western consumer chastened, with unemployment high, with housing prices low, with a financial system that's still not completely healthy and not willing to extend the sort of credit that it did in the past. As a result, the Western consumer is in this phase of rebuilding wealth, building up savings, and not consuming so much, which means that Asia has to take up the slack. China will probably need to increase its domestic demand—its consumption, in particular. Other countries will need to as well.
In that context, with China and India growing so strongly, it really pays Sri Lanka to reorient itself more from U.S. and Europe which currently account for close to 60 percent of Sri Lankan exports, toward India, which only accounts for 4 percent of Sri Lanka's exports, and to China—only 1 percent of Sri Lanka's exports. Such regional integration can help Sri Lanka become more competitive and boost its export share.
QUESTION: Some economists say that it’s an issue of transparency…that is basically the bugbear (inaudible)…FDI inflows into our country being too slow. What have you to say to that?
MR. MATHAI: You know, honestly I don't know since I am not a businessman operating here on a daily basis.
SPEAKER: But you know there are some certain economists who...
MR. MATHAI: Let me strike a note of humility for all economists [laughs]. Economists are operating at a rather academic level, where we are forming our ideas about the economy based on what we know of theory and what we hear from people in the private sector. We do our best job, but ultimately in terms of making an assessment of factors like that, the only ones who can do it are those who are in the trenches on a daily basis, trying to figure out the paperwork, trying to figure out what their joint-venture partners are saying to them that day, etc. It's very difficult for me to comment on that sort of thing.
QUESTION: How important is the IMF loan at the moment, because we have seen a couple of articles saying that we don’t need the IMF…
MR. MATHAI: Dr. Gunaruwan.
SPEAKER: Also Dr. Amunugama last week. How important is the IMF loan?
MR. MATHAI: I didn't see Dr. Amunugama’s comments, but I remember Dr. Gunaruwan's op-ed from some months back and his point was basically that we have now built reserves up to healthy levels, and therefore we don't need the IMF. That was Dr. Gunaruwan's idea. I think he is correct to say that one of the two main areas of the IMF program is much stronger than it was when we started, and that's the country’s external position. But let's not forget that there were always two problems that we were trying to address in the program, external and fiscal. Fiscal also is still weak but it's definitely on an improving trend. Is it time for us to declare mission accomplished and to go home? The historical record on such declarations is not a very good one, so I think we should be cautious! I’m being light-hearted, but in a more serious vein, the government has always told us that they find our presence useful, and insofar as we can be useful, we are happy to stay engaged.
QUESTION: You've mentioned inflation as being under check, but I guess if you ask a lot of ordinary Sri Lankans about things like food prices, they would be agog to hear that.
MR. MATHAI: I think you are quite right to ask that, and I'm glad you gave me the opportunity to answer, because food prices definitely are increasing.
I’m not sure of the rice price statistics recently, but definitely the vegetable prices have increased quite dramatically. One good point there is that vegetables are a short crop—maybe a month or two. So, hopefully, conditions could turn around fast.
But a more fundamental point—I don’t want to go too much into the details, because I’m not an agricultural expert—but these are all in the realm of supply shocks. That’s not to minimize for a minute the pain that they inflict on the ordinary citizen. The ordinary citizen is facing pressure. There’s no doubt about that.
At the same time, it doesn’t mean that underlying inflation trends are getting out of check. And it is those underlying trends that the Central Bank needs to look at, in deciding its monetary policy.
See, prices are the product of demand in the economy and supply. Monetary policy is essentially a demand-management tool. If the Central Bank were to raise interest rates, trying to curb inflation, they would also reduce the economic activity and increase unemployment. That would be a very bad outcome for an economy whose activity had already been affected adversely by a supply shock.
Economists don’t usually think the best response to a contraction in supply is a policy-induced contraction in demand. We only start thinking about a demand contraction—that is, a tightening of monetary policy—when we see the supply shock spilling over into the demand side. When we see consumers’ in the economy saying, “Hey, food prices are high. We better start asking for higher wages from our employers.” And then the employers’ saying, “Well, wage costs have gone up. Therefore we need to start charging higher prices on all the goods and services in the economy.” It’s only when that sort of thing happens—if it happens—that we start thinking about monetary policy as an appropriate response.
So, prices of individual commodities may have risen, but the overall inflation statistics are in control, and, importantly, the demand side of the economy seems to be in check.
QUESTION: Is there room for liberalization of trade in terms of agricultural imports, where prices are volatile?
MR. MATHAI: Well, I’ll tell you, I’m not an expert in trade, let alone agricultural trade. My naive observation would be simply that opening up food imports at this point would be good. But many other countries are restricting their exports of those goods at the same time. So I think this is a topic that needs further discussion.
QUESTION: Shinohara had mentioned that the exchange rate will need to be sufficiently flexible in both directions. Is there a concern there? Does the IMF see that the Central Bank is controlling the exchange rate?
MR. MATHAI: Well, I think he has said exactly what he meant to say, and what I also would like to say—which is that the exchange rate needs to be flexible.
Look, I think the general understanding of economists now is that pegged exchange rates can introduce some risks. We have a flexible exchange-rate regime, but for a long time, we saw the rupee-dollar rate absolutely flat at 114.8.
We were never very excited about that. We thought it would be better to have some volatility. And the Central Bank came back to us with the very reasonable and very correct response that, “faced with the onslaught of capital inflows that we’ve got, there’s nothing that we can do but keep the rupee absolutely flat, or to let it appreciate. And we don’t want to hurt the exporters with a disorderly appreciation. And therefore we’re buying the dollars in order to build up our reserves—and keeping the rupee constant.” We at the IMF thought that was a sensible policy.
Over more recent months, we’ve seen some appreciation of the dollar. We’ve gone into the 111, 110 range. A little depreciation recently, but generally, over the last few months, some appreciation. And we were glad to see the introduction of flexibility in one direction. That’s certainly a good thing, because it indicates to the market that exchange rates can move, that there is a potential for capital gains or losses if you want to engage in carry trades.
But we would like to see that flexibility in both directions, so that the market is fully aware that, in fact, it is a flexible exchange rate regime, so that competitiveness can be maintained over the medium term, and so that the overall health of the economy can be preserved. That’s, I think, what Mr. Shinohara meant.
QUESTION: Yeah, but the real effective exchange rate (REER) is at 123.
Don’t you think going forward that ultimately it’s going to really hurt exporters?
MR. MATHAI: Well, I think that’s a very difficult question. I used to work on the U.S., and one lesson that I absorbed very early on was not to make a call on exchange rates [laughs]. Because exchange rates can move all over the place. And, again, reiterating this theme of humility that I mentioned before, I think economists find it very difficult to pin down what an equilibrium rate is.
In the U.S., for instance, we were telling the government for some time that the exchange rate may need to move in one direction. And they said, “Well, you’re not properly interpreting the role of capital flows.” And that’s true. It’s difficult to interpret those in some of our models.
In Sri Lanka also, we have substantial capital flows, and it may be difficult to see where exactly the rupee should be. There’s a need to preserve the competitiveness of exports. And the government probably also sees an inflation risk on the other side. So balancing these two concerns is always a difficult thing.
Without taking a position on the level of the exchange rate, what we always thought a more productive thing to do is to focus on the quantity side of things; to say, “We want to build up our stock of reserves so that the Central Bank will have more flexibility to deal with future situations,” and then let the exchange rate adjust as it needs to. But we’re not going to take any particular stand on that price side of issues.
QUESTION: Is there a significant difference between your projection for growth this year, which is 7 percent, and the Central Bank’s projection, which is 8.5 percent?
MR. MATHAI: I think we’re both generally saying that the economy is bound to grow quite fast now. Eight-and-a-half percent is probably different from 7 percent. There is probably a slight difference in view. But fundamentally, we’re both seeing things pretty optimistically for the economy this year—and going forward.
QUESTION: Have you looked at the Central Bank’s forecast, and how they determined it would be 8.5 percent? What’s missing in your forecast?
MR. MATHAI: Well, I think the key is not so much to look at the sectoral breakdown of it, but to look at the overall picture. Growth projections are a difficult business. And however sophisticated you make them, there’s always some element of gut instinct that goes into them.
The Central Bank may have a slightly more optimistic view on things. But at the end of the day, there’s not a substantial difference. We’re both saying that the economy should grow strongly.
QUESTION: Do you feel that your numbers (inaudible) are confident what the Governor said recently that last year’s deficit was 8 percent? And is that the reason why your board is set to approve the next tranche?
MR. MATHAI: All indications are that that 8 percent fiscal deficit goal for 2010 is within reach. As I said, we don’t have the final data to evaluate our net domestic financing criterion, which is the way we measure that 8 percent target. But it seems to be on track.
QUESTION: Have you revised the original budget deficit target? Because the original target for 2009 was 7 percent. 2010 it was 6 percent, and 2011 it was 5 percent.
And that’s excluding the reconstruction costs. I mean, have you revised it? Now an 8 percent deficit?
MR. MATHAI: Well, I think you’ve answered your question. Clearly, there has been a revision.
QUESTION: What’s the revision (inaudible)?
MR. MATHAI: You’ve said it exactly correctly—that, whereas before, we had a target of 5 percent for 2011, now we are reaching that 5 percent target in 2012. So there’s been an adjustment to the path.
QUESTION: What’s the target this year? The IMF target.
MR. MATHAI: Well, we don’t have any separate targets. We’re operating on the same figures that are in the budget—a deficit of 6¾ percent of GDP.
QUESTION: You agree with the government on that?
MR. MATHAI: We agree that it’s a good goal to shoot for. We agree that it looks achievable. The numbers seem to add up. The revenue costing and the expenditure numbers seem to make sense. But as with any budget, there’s some uncertainty and we’ll have to see what happens.
QUESTION: When did you all revise the numbers?
MR. MATHAI: Some time back.
QUESTION: In the context of what you said about inflation, and also given credit growth, do you think there is room for further rate cuts?
MR. MATHAI: Well, I think, at this point, we are probably counseling keeping monetary policy where it is. We think monetary policy is in the right place right now. We would probably, at this point, counsel neither cuts nor hikes. But, of course, that all is subject to future developments. We would have to reevaluate on an ongoing basis.
QUESTION: How concerned is the IMF on external debt?
MR. MATHAI: I think this is part of the overall fiscal issue that we saw.
We were generally concerned about the fiscal position. Sri Lanka had too high a debt—external and domestic. The overall debt was too high.
That debt seems to be coming down. With the deficit path that they’ve laid out, even with some conservative assumptions on interest rates and growth rates, it seems that that debt ratio will come down.
So, we see it as a concern, but we see it as a concern which is being addressed through the program.
QUESTION: You said that the next three to six months are going to be crucial as far as FDI flows are concerned. Could you kindly elaborate?
MR. MATHAI: I think what I was trying to say, merely, was that now the budget is over, the policy framework is very clear. The economy is recovering. The outside economy also is recovering.
Now we should see money coming—we would hope—in the next three months / six months / 12 months. I’m not sure what the time frame is. But we’ve already seen some rather high-profile projects come in—Shangri La, this other Chinese hotel company. And, hopefully, we’ll see more of that sort of thing going forward.
QUESTION: What’s the single highest risk at the moment Sri Lanka is facing?
MR. MATHAI: “The single highest risk”—I think this is always a difficult question. But I think the easy answer—but also the true answer—is that policies may not be implemented as they have been laid out. I think that’s a general risk that applies in almost any country. But I think it applies here, as well.
The policies that they’ve laid out seem excellent to us. Now we are looking forward to the implementation of those policies—in terms of the macro targets, in terms of the tax reform, in terms of the investment-promotion reform, in terms of the state enterprise reforms. In all these areas, we’re looking forward to the implementation of the excellent policies that have been laid out.
QUESTION: Do you feel there needs to be an adjustment to the retail petroleum price?
MR. MATHAI: I don’t think we’re taking any specific view on that.
What we have taken a view on is that the overall financial picture for the electricity board and the petroleum company needs to improved, and indeed brought to breakeven status, by the end of the year. That would probably involve a whole package of measures, and the government has outlined some of those measures.
QUESTION: But you will have a view on subsidies, which is applicable to petroleum, electricity, and a broad range of (inaudible). So on petroleum in particular, do you have a view? The view should be guided by what view you take on subsidies in general.
MR. MATHAI: I think our view, in general, is that general views have to be tailored to specific circumstances [laughs]. I think it’s quite true here.
Look, there have been some duty waivers given in recent weeks, for some basic commodities. We understand the rationale for those, because people on the street are hurting. That’s a reasonable thing. At the same time, it has to be balanced against the fiscal constraints the country faces. These two always have to be balanced.
How best to balance it? We have to continue discussing that with the government, and they have to make their minds up in the best way possible.
QUESTION: Would the introduction of a pricing formula for energy reduce the economic risk?
MR. MATHAI: We haven’t taken a specific stand on that yet in Sri Lanka.
QUESTION: Is there rationalization of expenditure in budget 2011?
MR. MATHAI: I think in 2010 we saw a lot of budget expenditure restraint. I think in 2011 we’re continuing to see some expenditure restraint. But the key focus, really, is raising revenues.
If you look at Sri Lanka compared to other emerging markets, and other developing economies, what stands out is not so much high expenditures. Any government budget has waste that can be eliminated, and all governments must work to reduce that waste. But the key thing that stands out in Sri Lanka is that revenues are quite low. And that’s why the government has focused on this tax reform. And we think that’s been the appropriate focus.
QUESTION: You have mentioned the pension reforms. What are the pension reforms the government has (inaudible)?
MR. MATHAI: Well, you saw in the budget a mention of some pension reforms, introduction of some new schemes. We want to discuss those more with the government, and understand more what the plans are, and the motives are, and the intended results.
They’re also working on new regulation of private superannuation funds. So that’s something that we’re going to discuss with them also on this upcoming mission.
All right. Thank you all. Thanks very much for coming.