Transcript of Press Conference on Sri LankaSri Lanka, December 3, 2013
Mr. Mathai: Thank you very much for coming. We have just had an IMF Executive Board meeting on Sri Lanka. It happened on Wednesday last week in Washington, and a press release was just issued. As per our usual practice, I’m holding this press conference to tell you what was discussed and to answer any questions you may have. Maybe I can start with an overview of the issues, to explain what’s outlined in the press release that you have in front of you, and then I’ll open it up for questions.
There were two items that the Executive Board took up in their discussion. First, there was an Ex Post Evaluation of the Standby Arrangement—the program—that the IMF and Sri Lanka had together from 2009 to 2012. The second item was more in the nature of the regular review that the IMF team does; this was called Post-Program Monitoring. In the past, of course, while the program was on, a team would visit every quarter or so to see how the economy was doing, to understand what progress was being made toward targets, and to give an assessment of economic policies. Usually the practice is that when a country comes out of an IMF program, there would be continued visits from the staff team just to keep in touch and see how the economy is progressing; we don’t want to totally disengage the moment a program is over. That monitoring is done by the regular staff team, while the Ex Post Evaluation is carried out by an independent team within the IMF, to see how the program worked and what could have been done better, and to draw lessons for future IMF programs, in that particular country or other countries.
Let me start by talking a bit about the Ex Post Evaluation. I find myself in an interesting position since I was not a member of that team, but their views have been endorsed by our Board, and I’d like to convey those to you. The basic assessment was that the program from 2009 to 2012 was successful. It restored stability to the economy. It prevented a balance of payments crisis from happening. So it was a success, and as we have often said in the past, it was the first IMF program in Sri Lanka’s history that was carried out fully, and in which the funds were fully disbursed.
At the same time, Sri Lanka was still left at the end of the program with vulnerabilities—there were fiscal weaknesses, and there were external-sector weaknesses. Some of the issues that Sri Lanka faced were ones that took a little more time to deal with. After all, the Standby Arrangement was intended as a short-term, emergency facility, to stabilize the economy and get it back on its feet. But some of the program’s goals were things that required time, and more of a structural look—for instance, state-enterprise reform, or the strengthening of revenue administration. The Board’s assessment was that in the program, there could have been more detailed measures underpinning some of the goals that we laid out. So rather than simply saying that the state enterprises should break even by such-and-such date, there should have been measures in the program, agreed with the authorities, saying that these are the particular steps that will be undertaken to ensure that the overall financial goal is achieved. And since this is not our normal area of expertise, perhaps we could have worked closely with the World Bank or ADB to formulate those sorts of measures. That was one point.
Another point the Board made was that consideration might have been given to changing the form of the program as we went on. You see, the stabilization goal was actually achieved very quickly. As you know, in 2009, a flood of money came into the country, and external reserves were suddenly not the problem that they were earlier in the year. At that point, perhaps we could have considered changing from an emergency-focused Standby Arrangement to a longer arrangement that was more focused on these structural issues. So those were some of the lessons from the Ex Post Evaluation—overall, definitely a success, but also some lessons to be drawn for our future engagement, both here and in other countries.
As for the Post-Program Monitoring, the assessment is that the economy is doing relatively well. There was global market turbulence earlier this year, and all emerging markets were affected by it. Sri Lanka did relatively well—it wasn’t affected too badly.
GDP growth has been solid; it has been quite strong. But at the same time, we see areas of concern. Trade statistics, revenue and spending data, and credit indicators show some softness, so overall we see growth at a still very respectable 6½ percent—quite a good figure compared to what other countries are facing. As for inflation, we don’t see major pressures. We’re forecasting that inflation will come down to 7 percent by the end of the year.
In terms of the fiscal position, we see continued progress in bringing the deficit down. It should drop to 5.8 percent of GDP this year, and the government is targeting a further reduction to 5.2 percent next year. Of course, there’s an important point to make here, which is that revenues have been weak, as we all know. In the face of that, the government has sought to maintain their deficit-reduction momentum by controlling expenditures, which is admirable, but at the same time, there’s a large priority on keeping capital expenditure up.
If we think about the budget, which came out recently—and about which there has been considerable public discussion, some of which we’ve contributed to—our overall view is quite positive, as is the view of many other observers. We see policy consistency in this budget. We see tax rates not being adjusted too radically. We see deficit reduction enshrined as a goal for another year. We see capital expenditure raised to 6.7 percent of GDP. We see some important measures to raise revenues (the VAT, which was extended to large wholesale and retail traders last year, now being extended to a broader swath of traders, with the turnover threshold dropped from Rs 500 million per quarter to Rs 250 million—a very good measure, we think, in terms of both raising revenue and leveling the playing field.) We also see important and very good measures to encourage financial sector consolidation and to promote listing on the Colombo Stock Exchange.
At the same time, we also have some concerns. The budget is predicated on a growth figure (7½ or 8 percent) that is higher than what we think is likely to obtain for the economy. And that means that, in our view, the revenue forecasts are likely to be a little too optimistic, and if we’re basing a budget on that, we may once again find ourselves, during the course of the year, having to cut expenditures in order to meet deficit targets. That, in turn, may mean that the capital budget that has been proposed may not be fully executed. That’s one risk that we see.
And it’s certainly true that capital expenditure needs to rise over time. I’m not saying that it needs to happen today or tomorrow. 6.7 percent of GDP is a very good goal for 2014. But over time, that figure needs to rise substantially. If you look at the East and Southeast Asian economies that this country always models itself after, those countries have substantially higher capital spending budgets. It’s only with that type of capital expenditure that you’ll have the sort of growth rates that the Sri Lankan authorities are targeting.
We see the need to raise capital expenditure over time, and thus we place great importance on raising revenues, in order to finance that. While we liked the extension of the VAT, there were other revenue measures in the budget that we were not all that keen on. Increases in export and import taxes go against the direction of trade liberalization and competitiveness. We fully agree with the goal of establishing food security for the country, but at the same time, import substitution as an ideology is a total failure. And that has been proved in country after country for the last half-century. It’s not a matter of opinion. It’s not a matter of IMF doctrine. It’s simply a matter of fact. So I think we have to be very careful when it comes to import tariffs meant to protect a whole number of different industries. It would be much more efficient—rather than, in an accounting sense, trying to reduce imports to improve the balance of payments—to promote exports in our areas of comparative advantage. Let’s not provide artificial incentives for capital, labor, and other factors of production to shift into import substitution, when it may not be in the country’s best interest. At the same time, again, I want to make the point that food security is always a goal that needs to be tended to. There’s a tension—some efficiency may need to be given up in order to make sure that you’re producing your own food at home.
Another measure that we weren’t that keen on was the extension of the NBT to the banking sector. There’s a potential for spreads, and lending rates, to go up, and that’s not helpful for an economy at this stage of development.
The reduced tax burden on professionals is something that has been discussed a lot over the past few weeks. We fully agree with the idea of trying to retain talent in the country, but if the goal is also to raise collections, we would have preferred to have seen that done through administrative measures, rather than through rate reductions—perhaps an upfront, larger licensing fee for these professionals, or maybe a withholding tax imposed at the hospital level for doctors. After all, the previous 24 percent top rate for personal income tax was already extremely attractive compared to many destinations in the world.
More generally, we would have liked to have seen more focus on tax administration in the budget—perhaps measures to deal with the simplified VAT, which seems to be a source of leakage; perhaps increased staffing at the Inland Revenue Department. What is mentioned is computerization of the IRD—a revenue administration MIS—and that’s a very important thing. But further measures would have been helpful.
We would also have liked to have seen—especially because the revenue weakness in Sri Lanka comes from direct taxes, and not indirect taxes, and because those direct tax collections are weak on account of so many tax holidays and incentives having been given in the past (a model that the government, to its credit, has changed)—we would like to have seen a comprehensive inventory of tax holidays and incentives. Maybe this has been done already, in which case it’s just a matter of publicizing it, so that people understand the incentives that have already been granted and how they can be rationalized over time. We see reports that a huge number of firms are graduating from their BOI tax holidays, and that’s a great thing, but a more comprehensive look at the situation might have been helpful.
And finally, the last point I want to make on the budget is that the CEB and the CPC really have turned around. Things are much, much better. But again, could there have been more structural measures to ensure that this position is sustained, and that it’s not relying—aside from the price increases—on the good weather that we happen to have had? We’ve gone a long way, but I don’t think we can claim victory is completely at hand, because some of this year’s good performance was a result of good weather.
What are the kinds of measures we are talking about? One is an automatic fuel price adjustment mechanism—letting domestic prices adjust in a natural way, on a routine basis, in response to changes in international oil costs. Another would be perhaps listing minority stakes in these enterprises (though maybe you’d start this process with other public enterprises first). Don’t privatize, but get some private-sector discipline injected into these organizations, increase disclosure, etc. This would also help capital market development in a big way.
So those were some thoughts on the budget. Stepping back to the general view of the economy, I said that growth has been pretty good, inflation has been pretty good, and the direction of fiscal policy has been good. The external balances have also improved. We’ve seen exports going up, imports coming down, and tourism and remittances remaining strong, and as a result, the current account deficit has shrunk. We expect it to be around 5 percent of GDP this year. But going forward, it’s going to be very important to stick to the flexible exchange rate. The Central Bank committed to this in early 2012, and we think that it has been extremely useful for the country. It has helped it to weather shocks, and it will continue to do so in the future. In our view, the flexible exchange rate continues to be a key part of the overall strategy.
On monetary policy, we would say let’s now take some time to assess the impact of all the easing that has happened this year, especially given that external conditions could change, as advanced-economy central banks consider how to exit from their unconventional monetary policy and taper, and eventually tighten conditions. Maybe it would be good to put the brakes on monetary policy changes right now, assess where we are, and then see whether there is scope for any changes later on, when more evidence has come in.
Finally, my last word—and this is far more than I intended to say!—the financial sector seems to be OK. Nonperforming loans have certainly increased, but they seem relatively manageable. Of course, things have to be watched closely, in both the bank and the nonbank financial sectors, but things seem to be all right.
And that really would be our overall assessment—things across the economy seem to be all right. This was the relatively positive view that the mission took. Let me stop there and open it up for any questions you may have.
Questioner: What percent of government debt is on commercial terms, and how does this compare to other developing countries?
Mr. Mathai: I’m not going to be able to give you exact figures off the top of my head, but when the staff report comes out, you’ll be able to see all those numbers. I think the general point you’re getting at, though, is the extent to which we should be concerned by the increasing turn to commercial borrowings.
It’s certainly true that in the past, Sri Lanka benefited greatly from having access to concessional funds. That’s one major reason why the average real interest rate on public debt in this country is just 1½ percent (that is, after adjusting for inflation). Compare that to the real growth rate of the economy—6, 7, 8 percent…much higher. So if you look at the debt-to-GDP ratio, the numerator is growing relatively slowly, because the interest rate is low, while the denominator, the GDP, is growing fast, which means that there’s an inbuilt tendency for the debt ratio to fall over time.
But you’re quite right—as the country has graduated to middle-income status, it is increasingly borrowing on commercial terms. And part of that is absolutely normal—it’s part of the natural progression of a country as it develops. What it means, though, is that over time, slowly, the average real interest rate on the stock of debt will increase. This means that it will be harder to do fiscal adjustment later, which underscores the importance of doing that adjustment now, when the going is relatively easy.
So commercial borrowings certainly have a place in any country, but they have to be done in a prudent way , the rates have to be looked at carefully, and—as we emphasize in the report—the returns that are gotten on the investments financed by those borrowings have to be sufficient to cover the borrowing costs. That simple idea always has to be kept in mind.
Questioner: Banks are not very keen on lending their money. They’re still extremely stingy. The result is a stifling of business, and nobody is willing to take a risk and get on with doing things. From what you’ve said, everything seems to be just right with the country. But on the street, everything is wrong. Your comments?
Mr. Mathai: Look, I don’t think it’s fair for you to say that I’ve said everything is just right! (laughs) I said that overall, things are all right, but I pointed out lots of areas where there are weaknesses. I think you’d also be hard pressed to say that everything on the street is all wrong. I don’t think that’s correct at all.
Certainly it’s true that credit growth has been very soft. That’s indisputable. It’s also indisputable that the reduction in policy rates has been slow to affect lending rates, especially at the long end of the curve. The transmission of monetary policy is not as effective in this country as it is in some other countries. And there’s a whole host of reasons for that, including the country’s stage of financial development, the amount of liquidity that is sometimes out there in the market (which can mute price signals), and so on and so forth.
In any country with this problem of low credit growth, we talk to the businessmen, and they say it’s because these bankers refuse to lend to us. And then we talk to the bankers, and they say it’s because these businessmen are all useless and have no good projects for us to lend to! (laughs) So I guess the answer lies somewhere between the supply and the demand. It’s difficult to put our finger on it. Certainly, credit growth has been slow—and that’s one of the points that I made earlier—viz., that the GDP statistics are showing very large growth rates, but we do have reasonably modest credit growth right now.
Questioner: Excuse me, is the modest credit growth due to the rise in the NPLs that you referred to?
Mr. Mathai: Well, I’m sure that’s one factor that is giving banks reason for caution. They’re seeing NPLs going up for a variety of reasons (gold price declines on pawning, etc.), and perhaps they’re being a little more cautious. But at the same time, the businessmen also might not be seeing projects that they want to finance right now.
Questioner: Partnerships between the public and the private sector have been rather low. Any reason for that?
Mr. Mathai: I think you’re right. Getting the private sector involved is going to be a key priority for the country. We all talk about getting up to 8 percent growth, but that will require more investment. Part of it is going to come from the public balance sheet—and that’s why we’re talking so much about raising revenue—but another part has to come from the private sector. The public sector has to stand back and say, here’s room for the private sector to get involved; we’re not going to be an impediment to you—rather, we’re actively welcoming you. But another model, of course, is public and private coming together—PPPs. Both of these are happening, in a limited way. They now need to happen in a more extensive way.
There’s any number of reasons why private sector activity is not as robust as some would have hoped, why FDI has been slow to take off. These are things that we’ve all talked about for years and years and years. I don’t think I have anything that new to add here—ease of doing business, general policy environment, consistency, signals given about the government’s desired role for the private sector in the economy, education, quality of the labor force, cost of electricity…all these factors are there and have to be addressed. Slowly these things are getting addressed, and we hope to see continued progress.
Questioner: Do you feel that the involvement of the military in commercial/development activities is an impediment to the country’s growth in the long run?
Mr. Mathai: Look, the IMF’s role is not to talk about the military per se, but the IMF’s role is to comment on the economy, and certainly we have heard from a lot of people that the involvement of the public sector—whether military or not—in the economy has sometimes resulted in an uneven playing field, making it difficult for the private sector to compete.
My own reaction to this is that if there’s a lot of manpower to be deployed, one model is to deploy it within the framework of the public sector’s running its own businesses. Another model is to take those same human resources and perhaps second them to the private sector; continue to pay their wages for social stability reasons, but give them over to be trained and used by the private sector. It seems like a win-win situation—the private sector gets to enjoy the labor and expertise of those human resources, those people get training and experience in the private sector, and you don’t have this sort of uneven competition.
Questioner: Any comments with regard to the fact that 30 percent of our population is on welfare benefits (Samurdhi)?
Mr. Mathai: This again is a topic that has been talked about a lot. The targeting of Samurdhi is certainly something that has to be improved. There’s no doubt about that. At the same time, we have seen a definite decrease—there have been questions about the statistics, but most would agree there has been a definite decrease—in poverty in this country. Yet we continue to have very high subscriptions to Samurdhi. So obviously there are some administrative issues that have to be worked out.
Questioner: Getting back to the private sector and the public sector, would it also be a stifling effect that the government constantly keeps looking over the private sector’s shoulder?
Mr. Mathai: Looking over their shoulder in what sense?
Questioner: In the sense that, whatever you do, you have to look backward. Don’t do anything innovative or otherwise, since…[inaudible]
Mr. Mathai: It’s difficult for me to say since I’m not in business. But maybe I can draw some parallels from this marketplace of ideas that economists operate in—economists like to discuss things, after all; they don’t do much! One lesson you can pull from that arena is that it’s very important to have an open atmosphere, where there’s debate, where there’s discussion, where all parties can contribute. If you don’t have that, then you’re not able to harness the best ideas that the country as a whole has. If people are not able to speak openly and point out both the strengths and the weaknesses, then you’re depriving yourself of a lot of good ideas.
Questioner: A few days ago, I attended a budget seminar given by Dr. P.B. Jayasundera. He said that the deficit is containable thanks to the fact that current expenditure has come from 20 percent of GDP in the 1980s down to 14 percent currently. What have you to say to that?
Mr. Mathai: I say that he’s absolutely right. There’s no doubt that current expenditure has come down, and all credit goes to the government for achieving that. At the same time, I am absolutely right to say that capital expenditures need to be increased further! (laughs) 6.7 percent of GDP is not the endpoint; it’s just the beginning of the journey. Capital expenditures have to be increased. If they are not, the targeted high growth rates will not be achieved. And as I said earlier, revenues need to rise in order to finance this increased capital spending.
Questioner: Is it true that in the tiger economies, the PIPs are at double-digit percentages of GDP?
Mr. Mathai: In Malaysia, public investment is about 12 percent of GDP. In China, at one point, it was over 20 percent. The authorities say, “Don’t hold these countries up as models, since they’re in totally different circumstances.” Fair enough. I’m not saying we need those figures tomorrow. But we do often hold Malaysia up as a role model for the medium term, so let’s look at all the parameters of that economy. And one of those parameters is very high investment. Another parameter is 12 percent of GDP in income taxes in Malaysia. In Sri Lanka, they account for just over 2 percent of GDP. So again, the authorities say don’t compare; it’s an irrelevant comparison. But I would beg to differ. I think it’s a highly relevant comparison. Income taxes provide some of the money that finances high investment in some of these other countries.
Questioner: It’s a form of direct taxes, right?
Mr. Mathai: Yes, income tax is the main type of direct tax.
Questioner: But in Malaysia and Vietnam, a large portion of income taxes come from state enterprises.
Mr. Mathai: So that ties into a basic point about improving the efficiency of the state enterprises, and no doubt, we agree. I think all parties agree. The government obviously is undertaking huge efforts to try to improve efficiency of the state enterprises. But those other countries also have big personal tax collections (not necessarily rates) as well as private corporate income tax collections.
The point I’m making is simply that the revenue envelope needs to be bigger. It’s only with a bigger revenue envelope that the government can spend on the sorts of productive things that it needs to spend on. Everybody is lauding the construction of highways, and it is worthy of praise. But we should have more of them. And we can have more of them if we collect more revenue. And as I said before, the issue is not so much indirect taxes, but rather direct taxes. If you look at direct tax as a percent of GDP in this country, it’s extremely low. It’s a regional problem—the same thing applies in India as well—but we have to get out of that if we want to achieve high investment and high growth.
Questioner: What’s the corporate tax bracket in Malaysia?
Mr. Mathai: I’m afraid I don’t have the figure off the top of my head. Again, though, it’s not so much an issue of rates. We have compared rates, and the big accounting firms have done it too—Sri Lanka is in the middle of the pack; the corporate tax rate is absolutely fine. The problem is that the base is too narrow, compliance is weak, and that’s why the revenues are not coming in.
Questioner: Sri Lanka also has had a history of having 19-20 percent of GDP in revenue collections.
Mr. Mathai: Yes, it did, and as the Secretary to the Treasury has said—again, he’s absolutely right on this—Sri Lanka had those high revenue ratios on the basis of commodity export taxes and very high import duties, and the country has moved away from that, which is great. We’re not saying to do that. Clearly we’re not saying to do that! (laughs) We’re saying to increase direct tax collections over time, and there’s some scope for indirect tax increases as well, such as this extension of VAT to the trading sector, which is a normal part of the VAT base in most countries.
Questioner: This increase in our debt levels, when you compare it to the possible tapering of quantitative easing…how do we balance that, especially since, as one of your colleagues once said, 50+ percent of our reserves is commercial debt, in the form of foreigners’ investment in government securities. So in the event QE starts tapering off, how should we adjust ourselves, and how should we prepare ourselves?
Mr. Mathai: Tapering poses a risk to any emerging market economy. All economies have to be careful and watchful. And yes, we’d say there is a premium on having strong reserves. There’s always a premium on having strong reserves, but particularly so at a time when the global environment is uncertain. And Sri Lanka does need to build its reserves further over time. Great progress has been made since 2009, but still there’s a need for an increase.
There are also reasons for a lot of optimism in Sri Lanka. First of all, we’ve had some evidence—this one episode of turbulence earlier this year, and Sri Lanka did pretty well compared to other countries. If you saw what happened in India, Indonesia, and Turkey, how Sri Lanka fared looks pretty good, and credit goes to the Central Bank for the way they handled it. At the same time, as I said, we always have to be watchful. We have to keep building reserves. Keep that flexible exchange rate as a buffer against these kinds of shocks...
Questioner: Should we accumulate reserves via debt or other means?
Mr. Mathai: Look, of course, our basic program during 2009-12 was founded on the principle of building reserves through current account adjustment. Borrowing reserves is not ultimately going to be the solution. It can be helpful in the short run, but it’s not going to provide a durable solution. So of course there’s a need for current account adjustment. There’s a need for the exchange rate to remain at competitive levels in order to promote exports and to keep imports at reasonable levels. These are all important things.
Sri Lanka has some reason for optimism, I was saying, partly based on this recent episode, but also partly based on the fact that the cap on foreign holdings of government securities is actually quite low—only 12½ percent of the total is held by foreigners, contrasting with Indonesia or Malaysia, where it’s two or three times that percentage. So the risk of money going out seems smaller than in other countries.
At the same time, as a country that still has a large current account funded by a lot of debt capital, there’s reason for caution. And of course, policymakers are always trying to be prudent, and we assume that this will continue.
Questioner: Will the effect of the easing of monetary policy be offset or diluted by the imposition of the NBT on the financial sector?
Mr. Mathai: As I said, the imposition of the NBT on financial services, by itself, holding everything else equal, certainly will tend in the direction of increasing lending rates. But the government has made many good points that overall there’s not much reason to worry—the public sector, including the SOEs, is borrowing less, so there are more resources for banks to lend; and corporate income tax rates are much lower than they were three years ago, so there is some cushion there. I’m not trying to overplay it. But still, this measure by itself would tend to increase interest rates.
Questioner: You say that external borrowings are high, and this report is asking the government and the private sector to be more cautious in borrowing externally. In the budget, commercial borrowings would be Rs. 97.5 billion. So ideally, how much should be borrowed next year?
Mr. Mathai: I don’t think I can give you a precise number. I think you have to assess the overall situation. You can’t just look at one element of the debt portfolio. You have to look at the overall debt stock, how the economy is doing, what the interest rates are like, etc.
The Central Bank has a well-oiled public debt machine with coordination from the Ministry of Finance, and they’re looking at these things closely. Economists are always cautious about things. And in this case also, we’re not saying commercial borrowing is bad. Commercial borrowing is a useful thing—it’s a way of taking savings that are coming from other countries where perhaps there aren’t high-yielding projects and deploying those funds in order to finance hopefully high-yielding projects in poorer countries that are converging toward Western or Northern income levels—this is financial intermediation across borders. The key there is ensuring that those funds are indeed deployed in those high-yielding activities, so that you get that return and are able to pay things off.
Questioner: So is it fair to say that the IMF is not concerned about foreign debt?
Mr. Mathai: I don’t think that’s fair to say at all! (laughs) The IMF is always concerned about foreign debt in almost any country. There’s no doubt that Sri Lanka has a high debt ratio. But what I said earlier is that the interest-growth differential works in Sri Lanka’s favor and gives the country space. As long as the deficits continue to come down—and that’s why we always emphasize deficit reduction and are happy to see it happening—and as long as the borrowings are done in a reasonable way and deployed in highly productive uses, then things should be fine.
But of course it’s something that has to be looked at. At nearly 80 percent of GDP, Sri Lanka’s debt ratio stands out in international comparison. We all know that. But that doesn’t mean that that’s the only assessment. Things can improve. There’s still a role for borrowing. But it has to be done prudently.
Questioner: Until now, have we been borrowing at a reasonable rate?
Mr. Mathai: You’re pushing me on this point! (laughs) Look, up till now, we’ve not seen the debt ratio increasing dramatically. It’s been roughly constant over the past four or five years. So in that sense you can say that things are OK. As for some of the borrowings, it’s not that we have expertise in analyzing individual deals, but certainly some of the rates that were contracted give cause for concern. It’s partly a reflection of the market at the time. And I think that’s why, when you start seeing interest rates like that, you have to be very careful about how those monies are invested.
Questioner: What do you think of the government’s new method of getting the state-owned banks, and also inducing the private-sector banks, to borrow externally—proxy borrowings of the government.
Mr. Mathai: If it’s just proxy borrowings of the government, then I don’t see much point. If you’re getting institutions to borrow and then covering FX risk for them, so they’re not really developing themselves and going out on the strength of their own balance sheets, then why not have the government do the borrowing itself?
But the goal that has always been articulated is not just getting money for the balance of payments, but trying to do some financial sector development—showing these banks, which hitherto have concentrated on Sri Lanka and not looked at international capital markets, that there’s a world out there and you can borrow funds, and that can develop the whole sector.
That can be very good, and it can also carry risks, because instead of just one party borrowing, you now have multiple parties borrowing. With financial sector liberalization, there comes great opportunity but also great risk. We just think that these things have to be done carefully. The rates have to be scrutinized. The returns have to be matched to the borrowing costs. And the appropriate borrowing vehicles—the appropriate institutions—have to be selected to go overseas.
Questioner: In the prevailing environment, where international rates are rising, do you think it’s prudent to go to international markets to raise capital?
Mr. Mathai: Well again, I can’t tell you whether today is the right day to go to the market—there’s a whole industry of investment bankers out there who advise on the right time to issue a bond, and things like that. But what I can say again is that any institution that goes out has to watch the rate it’s paying and make sure that the funds are invested in productive ways. And if we’re thinking of financial sector development, we should have those institutions not just expose their books to international scrutiny, which is helpful per se, but they should also bear the FX risk and have the whole package make sense from a private-sector point of view.
Questioner: But if such external borrowings are underwritten by the government, as is the case currently?
Mr. Mathai: Then I think the financial-sector-development case is much weaker.
Questioner: You mentioned the idea of changing the form of the SBA. What was the intention and what sort of change was considered?
Mr. Mathai: Well, it’s not that they considered making a change. Rather, this independent staff team that came here said, “Maybe you should have considered making a change.” We had an SBA for 20 months, and then it got extended to a three-year arrangement. That itself is a bit oxymoronic, since a Standby Arrangement is meant to offer short-term help in an emergency. But then why do you have it for three years? I think this was the basic point being made. If you want to give three-year assistance to a country, and you’re trying to address structural weaknesses, such as in revenue administration or in the state enterprises, then maybe you should do so via a different sort of IMF lending vehicle, instead of an SBA.
Questioner: Is it that your colleagues felt that structural sustainability would have been imposed within the framework of the SBA, going forward?
Mr. Mathai: I think the idea was that after that initial phase, after the flood of money came in and the immediate problems were surmounted, maybe at that point the focus could have been changed to structural issues, and along with that could have come a change in the lending facility, to one which focuses more on structural issues. All of this in consultation with the government, of course.
Questioner: But in your defense, at that time, the whole focus from our side was not to do structural stuff with lots of conditions, etc.
Mr. Mathai: I’m glad that you’re defending us—thank you! (laughs)—but this is why it’s a bit difficult for me to talk about these findings. Yes, at the time we did make that judgment, but I guess the Ex Post Evaluation says that another view could have been taken.
Questioner: If you all had stepped into another role, would there have been any difference in the interest rates on your lending?
Mr. Mathai: No, I don’t think so. That would have been the same.
Questioner: A more structural-heavy program might not have been completed.
Mr. Mathai: It’s very easy to spin these scenarios and to second-guess. Look, these are thoughts that a team came up with and that the Board endorsed. And actually, we ourselves on the regular team found this to be an extremely useful exercise. I’m not saying this to be polite—I personally found it to be very useful, because sometimes when you’re involved in the details of work, you’re carried along with the momentum and don’t have time to think about the overall strategy. It’s a very helpful exercise, and that’s precisely why the IMF is trying to do it in different cases. It’s not a matter of judging the past but rather of drawing lessons for how we design programs and conduct our operations in the future, either in this country or in other countries. Hopefully some knowledge will come from this, and it will be used in other cases.
Questioner: I’m a little bit inquisitive because this will be your final press conference—not that we want to see you leaving.
Mr. Mathai: Right. Thank you for that! (laughs) But yes, I did want to say that this is going to be my last time addressing you. I’ve been here since October 2009. I think that, after more than four years here, I am the longest-serving rep that the IMF has ever had in this country, over the past 35 years. So, all good things come to an end, and it’s time for me to move on, I think. Within a month, I’ll be moving back to Washington to take up a new assignment at headquarters. A new person will be coming, I’m guessing, probably in February or March. So your next press conference will be with that person.
Questioner: So, you all have successfully conducted this program. In other countries where a program has been completed, what sort of progress have those countries made post-program? Are they on the right trajectory?
Mr. Mathai: I think that is exactly why we have this Post-Program Monitoring vehicle. We don’t want to have intensive engagement with a country, disburse all the money, and then say, “Bye bye; we’re not going to talk to you again!” No, we always want to keep up the dialogue. Not to check up on the government, but for our benefit as well—to understand what the thinking is, to understand what the policy direction is. I think when there’s close dialogue like that, that both parties really benefit. Hopefully, the idea is that with that Post-Program Monitoring, policies remain strong and success is achieved.
Questioner: Is the government of Sri Lanka essentially very open in their discussion?
Mr. Mathai: Well, of course. We’ve been here. My office is here. We’re talking all the time to the central bank and to the government.
Mr. Mathai: Are there any other questions? If not, then I’ll call it to a close, and I’ll thank all of you not just for attending this press conference, but also for your cooperation and friendship over these past four years. Thank you. It’s been a real pleasure for me.