Transcript of a Press Conference by Koshy Mathai, Resident Representative of Sri Lanka, International Monetary Fund

Washington, D.C.
April 5, 2011

MR. MATHAI: Thanks very much to all of you for coming. We called the press conference because, as you may know from the press release that was put out on our website, the IMF board met again yesterday, that is Monday the 4th, to approve the sixth review of the program, so that means there will be another release of $218 million which will come in the next day or so. That will bring the total releases of cash up to $1¾ billion so far.

There has already been some misleading coverage of this, saying that we have disbursed money despite the key targets’ having been missed. That's simply false. What we've done is we've asked for waivers of applicability. I won't explain it in great detail because we talked about it at the last press conference, which was not too long ago. The point, though, is that the last performance criteria applied to end March, and since it's just the beginning of April, we don't have data on those criteria right now. We don't have any clear information that the targets were missed. As a result, we've simply asked the Board to waive the applicability of those targets. It’s not that they’ve been missed and that we’re asking for waivers of nonobservance. It’s only a technicality, because the data have not come in yet.

All in all we continue to be pretty happy with how the economy is progressing and how economic policies are being implemented. Growth is continuing strongly. Inflation has gone up, as we all know, but from our perspective that’s happening because of supply shocks—both the flooding that occurred earlier and the rise in international food and fuel prices. And these are not necessarily things that the Central Bank, with its demand management policies, would want to respond to. Raising interest rates would deter investment and slow growth, and while this could lead to a reduction in prices of some goods—though likely not of food or fuel—it could also lead to fewer people having jobs. People who are now worried about the cost of living going up would find the situation even more unbearable if they were out of work.

So, this is the balance that has to be struck, and usually economists say that when there is a supply shock, you wouldn’t want the central bank to respond immediately, at least unless you saw that there was some spillover into core inflation or into inflation expectations. And as far as we can see, that hasn’t happened, but we have to watch this very carefully.

Just as a matter of statistics, we think that the headline inflation figure will rise for the next couple of months, but then it will come back down later in the year toward more comfortable levels. As such, we think that there is no cause right now for a change in monetary policy, but it's something that has to be watched carefully in this country and in other countries.

If and when there is a need to tighten monetary policy, probably it would not involve just rate increases but, rather, some direct measures to tackle the excess liquidity which is in the system, because in the presence of that excess liquidity, simply raising policy rates at the central bank may not have the desired effect.

So, growth is okay and inflation so far we think is all right. The fiscal position is on the right track. The government targeted a deficit of 8 percent of GDP last year, and they seem to have met that. This year they've targeted 6¾ percent of GDP as the budget deficit, and it looks like they should be on track for that. There was of course additional expenditure that was caused by the response to the floods, but the government intends to deal with those costs within the existing budget envelope.

For state enterprises, as you know, there's a commitment to bring CEB and CPC, on a combined basis, to break-even status this year, that is, to eliminate their losses. And in that context, the recent price increases which were passed are a painful but necessary part of that adjustment.

On the external front, the reserves are looking quite strong. We continue to urge that the exchange rate be managed in a flexible way in both directions—that's something we've talked about for a long time in the past. And on the financial sector, well, work is continuing. The financial sector seems quite stable, and the authorities are focusing on deepening the markets, in particular working on developing the corporate bond market.

I've given a little bit of an introduction here, but let me stop now and take any questions you may have.

Questioner: The petrol and diesel price rises could lead to a spiral; March inflation is already very high year-on-year; and inflation could end up nowhere near predictions. Does this worry the Fund?

MR. MATHAI: The direct impact of fuel prices in the CPI basket is not that large, but of course there are indirect impacts too, spillovers into other categories. Right now we're thinking that it should be manageable. It’s undeniable that the increase in fuel prices will have some impact on inflation, but it's a measure that had to be taken and overall, we feel that the inflation trends are under control and that those numbers will start coming down later during the year.

Questioner: You were saying that the waivers of applicability are being requested on the grounds that there are no statistics—is that what you're saying?

MR. MATHAI: Yes, basically. In any country it takes a few weeks for the numbers to get pulled together. Right now we've just had a scheduling of the Board meeting which happens to be right after the end of March.

Questioner: But why not wait for the statistics to be released in their normal course?

MR. MATHAI: We could wait, but in many cases we end up going to the Board beforehand. You’ll remember that the last time as well, in early February, we had a similar situation. It's part and parcel of this tight schedule that we're on, where we're going to the Board quite frequently.

Questioner: That time also you waived.

MR. MATHAI: We already knew that the target on reserve money at end-December was met, but there was a waiver of applicability for net domestic financing, and now with the data having come in, we've confirmed that the NDF target for end-December was also met. For net international reserves, you'll remember there was a waiver of nonobservance because they had actually missed that target. But it turns out that they missed it by a slightly smaller margin than we had thought back then, so the news has been good. And for end March, we don't have any clear indication that any targets will be missed. Therefore we assess that it's okay to go ahead.

Questioner: You all were not that flexible. You all waited for the December 31, 2009, figures.

MR. MATHAI: I think the point is that if we have a belief that the targets are likely to be missed, then we're not going to waive applicability. We're not going to proceed on the basis of data unavailability if we have a hunch that targets are going to be missed. That's what was happening then. We had an idea that there might be a problem, and that's why we held back from going to the Board. In this case we have no clear indication that there's going to be any problem. It's purely a matter of the data’s not having been compiled. That’s why we have gone ahead.

Questioner: When you say ‘A rephasing of the remaining disbursements’, what does that mean?

MR. MATHAI: Thank you for raising that. I should have explained it up front. You know that we're on a quarterly review cycle now, so every three months we are going to the IMF Board and asking for another disbursement. And tied to that, an IMF team comes here every quarter. What we're doing now is that the team is going to continue to come every three months--and I'm going to continue to be here all the time--but we're only going to go to the Board every six months. So rather than going every three months and preparing a whole set of papers and causing a lot of work for everybody, we are moving to semiannual reviews. The IMF board is only going to assess formally Sri Lanka's performance every six months. That means that the Board is going to look at performance through end June, and then they're going to look at performance through end December. They're not going to look at performance through end September. And it just saves a little bit of administrative work on everybody's side moving to that kind of arrangement.

If we were still at the very beginning of the program when things had just started and performance was just starting to be good, we probably wouldn't have done this. The Board probably would have wanted to have been apprised of developments every three months and to have the opportunity to give their view. But given that things have been progressing pretty smoothly with the program, the Board felt that it was appropriate to go to a less intensive monitoring schedule. But just to emphasize, the staff will still be visiting on the same schedule that they were in the past.

Questioner: These statistics will not be available in June though.

MR. MATHAI: Right. What I mean to say is that the Board will next be assessing the end-June numbers. Those numbers may only be available in the middle of August, say 6 weeks later or maybe a little bit after that. So presumably we would only go to the Board sometime afterward.

Questioner: Where does this confidence come from, to move to a quarterly schedule?

MR. MATHAI: I think the confidence comes from the fact that we are now at the sixth review. Tell me when in the past in Sri Lanka have we had the luxury of talking about the sixth review? In the past we've always had program approval and one review and then the end of the program. So now I think that after six reviews the track record seems reasonably strong, so the Board felt it was okay to go along with a semiannual schedule.

Questioner: Is it based on the central bank's figures, or have you done any assessment which basically says that everything is good with the Sri Lankan economy?

MR. MATHAI: We are a very small team of people looking at the economy, so we’re not producing primary data ourselves. We are looking at central bank statistics, Ministry of Finance statistics, commercial banking statistics as well. So, no, we are not creating numbers ourselves. We are looking at the government numbers, but I think that's the appropriate way to do things.

Questioner: What about the Department of Census and Statistics numbers? Are you looking at those too?

MR. MATHAI: Of course. Of course.

Questioner: Why don't you publish what your targets were?

MR. MATHAI: The targets are published, sir.

Questioner: International reserves and all the targets?

MR. MATHAI: The targets are there. Yes, if you go to the website, there is a Letter of Intent, and attached to the Letter of Intent there is a table that gives all the targets, and the performance against those targets, for each date, for September, for December, for March, etc. All of that is there quite transparently.

Questioner: But why don’t you give a summary? There are so many things said in those tables, that we don’t know where we are, actually. MR. MATHAI: Shall we go through it? We can go through it now. If you go the Letter of Intent which is on the Central Bank website, you will see a table which is called Table 1, “Sri Lanka, Quantitative Performance Criteria and Indicative Targets.” There are lots of lines in the table and lots of footnotes, but really there are three key lines. First is net international reserves, second is reserve money, third is net domestic financing. If you look at the end-December columns, there was a target for net international reserves of “1277.” That means that our target for last year was that they should have built up net international reserves by $1.3 billion. In fact, the outturn was “921.” $921 million was accumulated, meaning there was a shortfall of $356 million. That was where they missed the target and that was why we asked for a waiver of nonobservance last time. You'll remember that was because there was this bunching of oil import bills and what they did is they paid more than the normal amount of oil bills than would be paid in the period and they were thus reducing their liabilities to the supplier. These were foreign-exchange liabilities and like any other debt, when they pay more than expected, we loosen the target. That's the normal way it goes. We discussed it at length during the last press conference. So there was a deviation of 356.

If you look at reserve money, the target there was Rs. 380 billion and the preliminary outturn was Rs. 359 billion, which means that they came in within the target. Monetary growth was not as large as was allowed under the program. And if you look at net domestic financing of the government--our measure of how big the deficit is--there was an allowance for net domestic financing of 255 billion rupees, and the outturn was 242 billion rupees. So there again total financing was less than what was allowed. The deficit was smaller than programmed last year. So for the end-December targets, one was missed for good reason, and two were met.

For end-March, I can tell you the targets but I can't tell you the outturn because we don't have the outturn yet. That's why we have these waivers of applicability. For net international reserves we have a target of zero. Now what does that mean? The target of zero means that we have not asked them to accumulate reserves in the first quarter of the year.

Questioner: Why is that?

MR. MATHAI: Reserves are a reflection of the balance of payments--current account flows, capital account flows. In 2009 there was a huge amount of capital coming into the country, and the total balance of payments surplus was $2.7 billion and corresponding to that the central bank was able to build up reserves. We had in 2010, a much smaller amount of capital inflows, and as a result the total balance of payments surplus was much less, this figure of 1.3 billion that I mentioned before. And we expected that much accumulation of reserves, but only 900 came in. This year we are seeing a balance of payments surplus of just $135 million.

Questioner: That is because of the huge current account deficit?

MR. MATHAI: I wouldn't say it's a huge deficit. Earlier the imports were unnaturally compressed because the economy was going through a slow period. Now imports have picked up again and partly because of that, and also the fact that capital inflows are not as great as what they were right after the end of the conflict and the approval of the program, for all these reasons the total balance of payments surplus is down, and the total reserve accumulation target for the year is only $135 million. And we've said you don't have to accumulate reserves in the first quarter; we'll simply ask you not to let it go down, and then do the accumulation later in the year.

Questioner: The Chinese have sent a lot of money, so there should be foreign capital coming in a big way.

MR. MATHAI: Look, foreign capital is coming in but capital is also going out. There are always imports that have to happen. There are oil bills, there are all sorts of bills, so we make a judgment as to how to do the phasing during the year. You have to look at seasonal factors too--avurudhu [Sinhala/Tamil New Year] is coming up; what does that mean for pattern of imports? And taking all of that very granular detail into account, we decided, along with the central bank, to set a target for zero. Let's not allow any deterioration of net international reserves in this first period, but we're not going to push for accumulation of a large amount either.

On reserve money, we have a target of Rs. 390 billion, and for net domestic financing a target of Rs., 101 billion. When you go to the website, you can read all these.

Questioner: You’ve reduced the domestic financing to Rs. 101 billion?

MR. MATHAI: I should be very careful. These targets are all on a flow basis. That is to say, from the beginning of the year, your financing of the deficit should be Rs. 101 billion. Last year's figure was during that year, and it's unrelated. The counter is reset at zero, at the beginning of the year and then you restart. Each year is unto itself. So we will wait to get the data on these numbers and then we'll see.

Questioner: So 255 is the domestic financing we borrowed in the first quarter?

MR. MATHAI: 255 was the target for end-December. That was the full year target for --

Questioner: For that year.

MR. MATHAI: For that year.

Questioner: But this quarter is 101.

MR. MATHAI: This quarter, 101.

Questioner: So it means roughly $400 billion for the whole year.

MR. MATHAI: Pretty close. The target for the end of the year is $359 billion. This accounts for seasonal patterns. And also, this is only the domestic financing of the deficit, so you also have to look at the timing of external financing: if you have some idea that the external flows are going to come in this month versus that month, then that has some implication for how much domestic borrowing has to be done in each period. If the external is not coming now, you have to do more of the domestic borrowing now. If more of the external borrowing is happening now, then you can do the domestic borrowing later.

Questioner: That’s not an estimated budget deficit?

MR. MATHAI: No, but it is consistent with the budget deficit of 6.8 percent of GDP for the year. So 6.8 percent for the year, given the external flows that we expect to be coming in, implies domestic financing of this figure that I gave you.

Just one last thing I'll say on this clarification, and then maybe we can talk bilaterally afterwards is that some of the targets I've given you are adjusted targets. Why are there are adjustments to the targets? If you look, there is a document called the Technical Memorandum of Understanding which explains all of it. For instance, we say that if you have a net international reserve accumulation of 100 and suddenly debt service is greater than expected by the amount of 50, then we're not going to ask you to accumulate the whole 100 of reserves. We acknowledge that debt service was higher than we all expected, and we'll only ask you to accumulate 50. Like that, there's a whole series of adjustments that are done because of other variables moving around. So some of these numbers that I've given you, the targets, are adjusted targets. But we can talk more, I think, afterwards.

Questioner: But listen, Koshy, this NIR was some $900 billion plus at 31 December 2010.

MR. MATHAI: $900 million, yes.

Questioner: For you all to give it an allowance to have depreciated to zero, how could that have been?

MR. MATHAI: No, no, no. This is a slight confusion. The counter restarts at the beginning, so the 900 was how many dollars were accumulated last year.

Questioner: Right.

MR. MATHAI: The zero is saying, “starting from that base that includes the 900, how much further?”

Questioner: Thank you.

Questioner: You are not suggesting a tightening of monetary policy and hiking interest rates despite the fact that there is a real fear of runaway inflation?

MR. MATHAI: I guess what I'm saying is that we don't have that fear.

Questioner: No, but oil prices are going up all over the place.MR. MATHAI: Look, oil prices represent a supply shock, and if the central bank tightens policy, they are not going to bring oil prices down. What they're going to do is bring other prices in the basket down at the cost of slowing down the economy and increasing unemployment. That's a balance that has to be struck. It’s an absolutely reasonable question that you're asking, but right now we don't think that the growth costs of taking such a policy are worth it. The benefits in terms of curbing inflation to us are not so great as to justify the possibility of slowing down growth and increasing unemployment right now. But again we have to continually keep an eye out for these things.

Questioner: So does that mean that the IMF wants the oil prices to be adjusted?

MR. MATHAI: I think they have already adjusted the prices last week.

Questioner: What do you think about government policy?

MR. MATHAI: I think what the government has said, they've always said for several years, is that we want our enterprises to operate on a sustainable footing, and I think the natural corollary of that is that if the input prices are going up, they're going to have to pass that on. That clearly has costs, but I've said it before in this room, and I want to say it again: to us, the right policy is to make the enterprises operate properly and then take care of the people who are affected by that. I don’t mean take care of the people who are driving their Prados and face a higher cost of fuel. Take care of the poor guy who is paying more, take care of the guy who may face an increased bus fare. Try to have some targeted subsidies that help the poor. Don't simply say that we need to have cheap fuel in order to help the poor when in fact the vast majority of the fuel that's consumed is consumed by those people driving the more expensive vehicles, people who don't need that kind of protection. That's the kind of policy that we're advocating, and I think the government agrees with it.

Questioner: But there doesn't appear to be a targeted subsidized scheme in the government scheme of things, Koshy.

MR. MATHAI: I think that's a key thing that the government needs to work on, and I'm sure they are working on it.

Questioner: There’ll be civil unrest if they do not have a sort of targeted policy to meet the needs of the poor.

MR. MATHAI: Yes, we think there should be such a subsidy.

Questioner: Are you all pushing the government?

MR. MATHAI: I don't think there's a need for any pressure. I think the government fully agrees. There's no need for convincing at all. The government agrees that there is a need to help the poor when they face these increased prices. I think that is something that we all agree on. I think we also all agree on the fact that using a very blunt instrument like keeping oil prices down is not the right way of addressing the problems of the poor, because such a policy has so many other beneficiaries who don't need the benefit.

Questioner: Koshy, do you feel that if interest rates are raised it's going to affect growth?

MR. MATHAI: I think this is a basic balance in economics. If you tighten monetary policy, you can bring prices down, but there is also a cost in terms of growth. That's nothing revolutionary that I'm saying. There is a tradeoff between output and prices. How best to strike that balance…well, that's the art and science of central banking.

Questioner: At the moment, there is a huge liquidity surplus in the banking sector. Do you think that they'll continue to hold a thing like this without in any way expanding credit or giving the government the money, the government will keep quiet like this. Where will this money go to, and what will be the effect on inflation?

MR. MATHAI: I think this is exactly the key question to be asking. There is a lot of excess liquidity sloshing around in the system, and the central bank's worry is that that money then can go to fuel credit growth. Credit growth already is at 30 percent year on year, but we have a nice chart that I wish I had brought here with me, that shows the total stock of private-sector credit relative to GDP. Credit relative to GDP is where it was at the end of 2008. It's not where it was in 2007 when credit was growing very fast. So even though the headline figure of 30 percent sounds very high, actually, relative to the size of the economy, the stock of credit is moderate. The two statements are consistent because, after all, for months and months credit was shrinking on a sequential basis. We were all bemoaning the fact that banks were not extending credit. Now they're doing it, and the question is what's going to happen with the extra access liquidity? Is the 30 percent growth going to turn into much higher numbers? That's precisely why we think that going forward it's an important thing--and the central bank fully agrees--that we try to figure out how to lock up that excess liquidity so that it doesn't go into irresponsible credit growth, so that it doesn't fuel unnecessary inflation…that's a very important thing. That's why more than just thinking about increasing the rate, there needs to be thought about what instruments can be used to manage the liquidity.

Questioner: Yes, but they continue to increase their liquidity when they keep on buying foreign exchange. It’s no solution, but rather making the problem worse.

MR. MATHAI: What's the solution? The other thing that you're recommending then is not to buy the foreign exchange, to let the rupee appreciate, but the exporters will cry and we will not have the reserve buffers that we need in order to manage future situations. There are tradeoffs in all of these things. There are very important policy goals, and you have to balance them all. We would say that there is still a need to accumulate reserves, a little bit of reserves. The reserve position is very strong, but as we all know, a portion of it is borrowed, and it's important to build up reserves that are generated through the current account.

Questioner: But there’s a big gap between the real effective exchange rate and the nominal exchange rate.

MR. MATHAI: Exactly.

Questioner: You’re then killing the long-term future of the country if you let the rupee appreciate further and hurt the exporters.

MR. MATHAI: You can't have both sides of the argument! (laughs) On the one hand you're advising that the central bank should not be buying the foreign exchange; on the other hand you're saying they should not be letting the exchange rate appreciate.

Questioner: Could you clarify?

MR. MATHAI: What we are saying is that if the central bank doesn't intervene at all, then there will be pressure on the rupee to appreciate. It may be a disorderly appreciation, and that's something that should be avoided. At the same time, there also a need to build up reserve buffers for prudential reasons so that we're able to weather any shocks that come in the future. So we think that it's the right policy to continue buying foreign exchange.

You're right that that does pump liquidity out into the system. That doesn't mean then that we forget about the foreign exchange targets. I would say you've got the foreign exchange targets, and that has a consequence in terms of liquidity. Let's then work on the instruments in order to manage that liquidity, so that it doesn't turn into the irresponsible credit growth and inflation that you're worried about, but let's keep the foreign exchange targets where they are.

Questioner: What I can't understand is there is no investment in the stock market by foreign investors, and there is no net investment in the bond market, so where is all this foreign coming from?

MR. MATHAI: That’s a conversation we can have later, I think. The money is coming from a whole variety of sources. And there's also an FDI flow that you're not talking about. In any case we can sit together with a table and discuss it.

Questioner: FDI came down to $500 million last year.

MR. MATHAI: I think it's a little lower than that. I think it's lower than that, but I'm talking about today’s inflows. I think the overall point here is what policy goals we have. On the one hand we want to build up reserves, we want to keep exchange rates from appreciating unnecessarily. On the other hand, we want to manage the monetary side of things. There's a balance, and the balance has to be struck properly, but I don't think --

Questioner: The central bank says they have got in excess of 6 billion rupees in reserves. Why do we need more?

MR. MATHAI: The $6 billion, if you look at reserve coverage relative to short-term debt, it's about 100 percent. If you look at many other emerging markets, reserve coverage is higher than this. Reserves in terms of months of imports have gone up a lot. The central bank talks about six months and we can talk about 4½, depending on whether you talk about goods and services or just goods. There is no doubt that the reserve position is much stronger than it was before. That doesn't mean that we can say mission accomplished and we don't need to buy any more dollars ever again. Of course there is a cost. There are sterilization costs. You hold those dollars and you earn a dollar return. And on the other hand, you have to sterilize that and bear a local rupee interest cost. I understand there is a cost that the central bank has to bear and that the government has to bear, but that's the cost of having a prudential buffer which is something that keeps countries out of problems like what was experienced a couple of years ago. So we strongly believe that there is cause to continue accumulating reserves, though perhaps not in the amounts that we were talking about before. Still, let's not give that up because of liquidity issues. On the liquidity side, we'll deal with that with monetary policy instruments, and the central bank has such instruments. They have Central Bank of Sri Lanka securities. Maybe we can work on using those a little more. These are discussions that are going on at the technical level, not so much policy issues.

Questioner: In terms of pure theory, what happens in a situation of such flux if you hold the exchange rate where it is, a constant? What happens to the economy?

MR. MATHAI: I'm no great theoretician (laughs).

Questioner: I’m not asking about Sri Lanka at all.

MR. MATHAI: I'm no great theoretician at all, but what I can say is that we strongly believe that the right policy is to allow an exchange rate here to be flexible. What does flexible mean? Flexible means that if there are a lot of inflows you can let the exchange rate appreciate, if there are outflows, you can let the exchange rate depreciate, and let the market determine. But of course no central bank is going to take a fully hands-off approach. Show me the central bank that allows an exchange rate to zoom up one day and zoom down the next day. It's not good for a market. A market needs some kind of stability, some kind of smoothing out of volatility. That's what the central bank has been doing, though more in one direction than in the other. And that's why we have been urging for a long time that there should be some allowance of volatility in both directions.

Questioner: Koshy, if your Board is going to review once in six months, will it affect disbursements?

MR. MATHAI: So the disbursements, rather than being $218 million will be more like $436 million.

Questioner: Oh, I see. Koshy, your program ends next year?

MR. MATHAI: The last test date, the last date of data that the Board will be looking at will be the end of December of this year, which means that the review associated with that will be in the early part of 2012. don't know when exactly, but sometime early next year we'll have the last review.

Questioner: Dr. Aitken’s team will be down next month?

MR. MATHAI: They should be here, yes, around the end of next month. Going on the six month schedule also gives us a little bit of breathing room. You'll remember that last time it was almost the next day after this press conference that the team came. That was because we had to go back to the Board within three months. Now that we have a little bit of breathing room, there's the ability to space out the visits a little more.

Questioner: So basically the Board will be taking the September review in December?

MR. MATHAI: Let me get out the table so I can give it to you very precisely. Right now we are giving this $200 million plus.

Questioner: That's March 31 figures?

MR. MATHAI: That's the thing. We've done a waiver of applicability because we don't have the March figures, so really this is as per December figures. Then at end-June we're going to have both the March figures and the June figures. You can think that we're giving two disbursements then, so something like $400 million plus in the middle of the year, perhaps in August. And then again in the early part of next year, we'll have another double review. We won't call them double reviews, but essentially it's something like that. So to summarize, we're going to have two more reviews, one in the middle of the year, one in the early part of next year and each of those reviews should involve double the money of this current review.

Questioner: Thank you.

Questioner: In terms of liquidity management, what are the options available?

MR. MATHAI: Yes, I think this is a discussion that's ongoing with the central bank and our folks as well, so let me not get into it now. I think this is certainly going to be one of the main topics of discussion for the team that's coming down in May.

Questioner: Are there worries about the sterilization costs that the central bank will have to shoulder itself?

MR. MATHAI: I personally don't get too worried about that because ultimately stabilization is an activity that the central bank is doing not for its own benefit but for the national benefit, and some arrangement has to be met between the central bank -- in any country some arrangement has to be made between the central bank and the Treasury in order to share that burden properly. This is an issue that we saw happening a lot in many countries over these last few years. In the U.S. you had the Fed placing a certain block of Treasury bills with the Fed in order that the Fed could so some mopping up operations when they ran out of Treasuries. Some arrangements have to come and have to be worked out.

Questioner: How do you see the ghost of public debt?

MR. MATHAI: The ghost of public debt? I'm not quite sure what that means. (laughs)

Questioner: We have an enormous 84 percent of GDP as public debt, and how does the IMF see it?

Questioner: It isn't the Holy Ghost.

MR. MATHAI: Whether it's holy or not, I think the ghost of the public debt is becoming a ghost of its former self. Can I say that? (laughs) Because what we have seen is that deficits are coming down. In addition, the debt dynamics in this country are quite favorable. Growth is proceeding at a decent rate, and moreover the real interest rate on average that the government is paying on its debt it quite low. So because of that you've got the denominator in a debt-to-GDP ratio, namely the GDP, growing fast and you've got the debt not growing that fast because interest rates are low, so the debt ratio naturally tends to go down. If you goose that with a tightening of the deficits in each year on a flow basis, then the debt comes down even more nicely. So, yes, I agree that 84 percent is far too high a number, but the direction is absolutely the right direction, and fiscal right now is not the primary concern for us.

Questioner: Thank you.

MR. MATHAI: Are there any other questions?

Questioner: All these years, since about 1977, the IMF has been trying to enforce budget discipline, but it’s never happened.

MR. MATHAI: All these years we had the war.

Questioner: War? This was even before the war. It has never happened. There is a structural deficit in this country. And the IMF will be back, probably, next year, I think.

MR. MATHAI: I hope that's not the case. (laughs) All I can say is that one always needs to look at what the past history has been, but I think it's even more important to look at what the recent direction of policy has been. And there, even in our time here since the program was approved we've seen the program go off track for fiscal reasons. In the fall of 2009, in December 2009, there was a miss of the target. Since that time, policies have been quite tight. They brought the deficit to 8 percent last year, 6¾ percent this year.

Questioner: Window dressing! Through window dressing.

MR. MATHAI: I'm not sure you would call this as tax reform.

Questioner: The old days of budgeting are not there now. Expenditures postponed till the next year.

MR. MATHAI: You’re asking if there is just window dressing or if it is a real adjustment? I would say fundamentally it's a real adjustment because the key thing there is the tax reform. They've done this tax reform which has been universally praised. We are quite happy with it in terms of its structural features, but also in terms of the fact that it's raising the revenue ratio…and we've gone through those numbers in some detail. We've costed the measures that the government has proposed. If you read the budget speech carefully, you’ll remember there was a table at the end giving costings of each of those tax proposals, and the yields that were presented there seemed reasonable to us. The huge growth of the tax base is not going to happen overnight, and we haven't counted on that. That is an effect of the Board of Investment reform and other things. That's an effect that will happen over a few years. But in all we're seeing a set of reforms that quite credibly adds up to revenues rising by say a half of a percent of GDP this year and another 1 percent the year after that. I think it's because of that that the deficit will come down. If they merely said to us we're going to leave revenues as they are but we're going to commit to tightening expenditures, we wouldn't believe it. I used to work on the U.S. desk at the IMF, and a standard trick in the U.S. budget was to say that discretionary spending would be cut to the bone. This was a trick under the previous administration, and everybody understood that it was not happening, but the promises were made. So that sort of promise we would look at with a jaundiced eye. But in this case where a real tax reform has been done—and I note that all the amendments have recently been passed—with this tax reform done, hopefully we're going to see basis for real growth in revenues.

Questioner: It’s not the revenue side. I’m talking about the expenditure side!

MR. MATHAI: Yes, but I'm talking about the revenue side because I think that's the key. I think you are missing the key point in focusing on the expenditures.

Question: The expenditure growth is something that cannot be controlled.

MR. MATHAI: Well, I think we'll see, because last year that's what people were saying and the target ended up being met. So I think actually in this last year, the expenditure growth has not been the problem. If you talk about 2009, yes, definitely there was expenditure growth. But in 2010 and I think going into 2011, not so much.

Questioner: When the IMF agreement is over, you all will have to come back.

MR. MATHAI: Let's see. (laughs)

Questioner: Koshy, the commitment by the government is to enhance revenue by half a percent this year and 1 percent next year.

MR. MATHAI: I think that's right. I'll just check on that for you.

Questioner: Thanks for all the trouble taken, Koshy.

MR. MATHAI: Yes, we're talking about half a percent this year and 1 percent the year after.

Questioner: You’ve said fiscal is no longer the primary concern. So what is the primary concern?

MR. MATHAI: Well, I think you've heard the messages that we've been talking about. We've been urging two-way flexibility of the exchange rate. That's something we've been talking about over the last few press conferences. And of course, on monetary policy, we're not saying that there's a need for an adjustment right now, but clearly that's something that needs to be looked at in the context of global developments and local developments. Over the next few months of course the central bank will continue to be vigilant and I think that's what they need to focus on. Are there any other questions?

MR. MATHAI: Then we'll turn off the mikes. Thanks to all of you for coming. I appreciate it.
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