Transcript

Colombo, Sri Lanka
Tuesday, June 29, 2010

MR. MATHAI: I’m Koshy Mathai, for those of you who don’t know me. I’m the IMF’s representative for Sri Lanka and Maldives.

We asked you here to announce what you might already have known from releases on our website and on the Central Bank’s website, namely that the IMF’s Board has completed the second and third reviews of the program, and this means that there will be a disbursement of US$408 million coming either today or tomorrow.

You’ll find on the Central Bank’s website and on our website a press release--and we have distributed copies of the IMF press release; I think you should all have that.

There’s also the government’s Letter of Intent. With each review there’s a letter in which the government outlines all of its policy intentions, and I encourage you all to have a look at that because it goes into great detail. You’ll find that on the Central Bank website right now.

When Brian Aitken, who is the mission chief for Sri Lanka, addressed you at the end of May, he said that we were very encouraged by the government’s policy proposals and that if everything went well, we could imagine going to our Board within four to six weeks with the recommendation to complete the reviews. And that’s precisely what has happened.

As you know, we have a fundamentally optimistic view on Sri Lanka’s economic prospects. Let me start with the basic observation that this is a country that for 30 years has grown at 5 percent, despite a war that has absorbed so much in terms of human and economic resources. Imagine all the foreign direct investment, indeed, all the domestic investment, that must have been deterred during these long decades. Now, with this burden lifted from the nation’s shoulders, it seems obvious, even, that the economy should be poised for great growth.

That all, however, presupposes that macroeconomic conditions can be kept stable, and we’ve been heartened to see that over this last year—more than one year, in fact—since the global financial crisis, there has been an enviable period of macroeconomic stability.

Let’s look at it piece by piece. International reserves have increased dramatically, now around $5 billion in international reserves at the Central Bank. Now, we continue to think that there’s room to build reserves up further, but clearly this is no longer the short-term priority. It’s quite different from a year ago. Now we have the luxury of thinking more about medium-term challenges for the economy. So, the reserve position is extremely strong.

Monetary policy is another area where we think things are going quite well. We think the monetary policy the Central Bank is running is absolutely appropriate for the current moment.

The third point is fiscal policy, and that’s the only area where we’ve raised any concerns. And indeed it’s because of those concerns on the fiscal position -- government deficit and debt -- that we had something of a pause in the IMF program with Sri Lanka.

Well, that pause has now ended. In our view, the 2010 budget and the related policy package that the government is undertaking represent major progress toward strengthening Sri Lanka’s public finances, and our Board has agreed with that assessment.

So, what do I mean by the policies that the government is undertaking? First of all, there’s the budget itself, and you all will have more details on this than I will, as you’ve just come from Parliament. But from what we understand from the initial numbers that we saw, the government is now targeting a budget deficit of 8 percent of GDP, which is higher than what was initially targeted in the program, but, nonetheless represents a substantial reduction from last year’s outturn.

There’s also an intention, as you’ll see in the Letter of Intent, to bring that deficit down to 6¾ percent next year and then further to 5 percent of GDP by 2012. Moreover, the budget deficit reduction is being done in a very sensible way. It’s not being done through unrealistic revenue projections. Indeed, the government has a relatively conservative projection of 14¾ percent of GDP in revenues this year. It’s also not being done through an artificial curtailment in capital spending. There are many countries—including countries that I’ve worked on in the past--which have achieved fiscal adjustment through freezing the capital budget, and that’s clearly not what this government has in mind. They have always emphasized the importance of infrastructure development, and we think that’s appropriate.

Rather, this compression in the deficit is being achieved through a reduction in recurrent spending, and I should emphasize, that I mean a reduction relative to growing GDP. Many categories of spending are being kept constant in nominal terms, but against a growing GDP that implies some savings, so the deficit in terms of GDP is coming down.

That’s the strategy for this year. For the next year and the year after that, the scope for compressing current spending further is limited, and there the government has more of a plan to boost revenues, from 14¾ percent of GDP this year, to 15½ percent next year, and 16½ the year after that. So, that’s one very important element in the policy package that’s given us a lot of encouragement.

Aside from that, you will have heard a lot about the tax reforms that the government is undertaking. We’ve seen the major steps that they’ve taken in terms of trade and excise taxes in the last few weeks, but beyond that we’ve got a Presidential Tax Commission that has much broader terms of reference and is looking at reforms to simplify the overall tax system, to broaden the tax base, and to increase the total amount of revenues collected. So, we’re expecting to see, and the government has indicated that their plans are, to do more of these tax reforms as the months go by. So, that’s another important point.

A third point is on the investment promotion regime. There is an emphasis on reforming the Board of Investment’s approach and developing a new strategy to promote investments, particularly in the sectors which are most important to the national interest. That new strategy would reduce the reliance on tax concessions and use other means -- a simplification of procedures that foreign investors need to go through, giving one point of contact to investors, other sorts of measures like that -- in order to promote investments in a way that still protects fiscal revenues.

There is also an emphasis on improving tax administration that goes along with these tax policy measures.

And last but not least, there’s been a lot of discussion of measures to improve the efficiency of state-owned enterprises, so that they’re less of a drain on public finances.

So, all told, this looks to us like a very substantial and ambitious package of policies. And it’s on that basis that the Board completed the second and third reviews.

Now, I want to clarify one thing. You’ll see in the press release that we’re completing two reviews here, and that’s an indication of the strength of the policy package that Sri Lanka has put in place. Usually when a program goes into a lull, as we’ve been in for the last few months, and it comes back on track, as is happening now, the typical practice is to extend the length of the program, and that’s what’s being done now. The program is being extended by a year. That’s a typical practice. In this case it also makes particular sense because the government is now not so much looking at short-term risks related to reserves and the need for the IMF in the very short term, but rather looking more at medium- and long-term policies to promote growth and asking the IMF to be helpful in supporting those policies. So, to us and to the government it made sense to have a slightly longer term engagement that covered at least the year 2011 when a lot of these policies are coming into effect.

Well, since we’ve got a longer program period with the same amount of money, basically $2½ billion, that implies less money in each disbursement going forward—more disbursements, but less money in each of them. But recognizing the strength of the package that the government has put in place now, the Board decided that it would be appropriate to grant two of those disbursements right now, which is why rather than the US$300 million-plus that we were granting in the past, we’ve gone up to US$400 million. In the future we’re going to see numbers more like US$200 million, but right now we’ve got a double disbursement and that’s some indication of the IMF Board’s assessment of the strength of the policies that are being put in place.

Anyway, I’ve talked a lot for an opening statement. Let me stop here, and I’ll be happy to take any questions you have.

QUESTIONER: Koshy, when reading your release sent yesterday, one gets the impression that you all were already privy to budget 2010 proposal. Is that so?

MR. MATHAI: Well, we knew the broad outlines of the budget. They had indicated to us roughly what the deficit would be, and I think Brian told you exactly that at the last press conference.

As for the particular details of the budget, no, we didn’t know. And that’s why I said that you all probably at this point know more about the details of the budget than I do because I have been preparing to meet you and not listening to what’s come out of parliament!

QUESTIONER: The opposition yesterday accused the government that before it was presented today, the budget was presented to IMF. Do you have any comments on that?

MR. MATHAI: Well, I think this is the same point that Paneetha is raising. The government had general discussions with us on their policy direction, saying that they wanted to bring the deficit down and that they wanted to do these various measures that I talked about. And I must say that these are all entirely homegrown policies. It’s not as if these are things that we were asking the government to commit to. These commitments made in the Letter of Intent are not so much commitments to the IMF as they are commitments to the Sri Lankan people. They happen to be expressed in the Letter of Intent, but they could very well be expressed in any number of other vehicles as well.

So, yes, there was a discussion of the broad outlines, but the details are something that we continue to learn about right now, along with you.

QUESTIONER: Yes, Koshy, also in your release you say -- you talk of protecting the vulnerable.

MR. MATHAI: Correct.

QUESTIONER: And then you said that one positive feature has been the increase in trade taxes. Now in the context of seemingly growing poverty in our country and the adverse impact that these trade taxes have had on the major populace of this country, how does -- how can you justify that overall your objective -- when I say “you,” I’m sorry, I’m basically identifying you with the IMF -- is to see that the vulnerable of society is protected?

MR. MATHAI: Right. I think that’s a very good question, and I want to ask you a question in return. Do you benefit from the duty waivers given on flour? I would say the answer is probably yes. All of us in this room when a duty waiver is given on a basic commodity, regardless of our income level, we enjoy the benefit of that. That is to say that the government, when international food prices and commodity prices were high, they introduced various waivers on duties in order to alleviate the impact on the general population. But the fact of the matter is that that kind of measure, while benefitting the poor, also benefits the middle class, also benefits the rich, also benefits the super rich.

In our view a more sensible thing is to eliminate such duty waivers and rather use that space in the budget to spend on directed, targeted subsidies that focus purely on the poor. And I think that’s what the government is trying to do now. Rather than having across-the-board tax measures that may not be properly directed toward those they are intended to help, let’s have a more rational system that is more targeted toward the poor.

QUESTIONER: But there’s a big question, Koshy, whether that is actually happening when, at the ground level, where you see, read, and hear of parents abandoning their infants because of them finding it difficult to provide sustenance to them, except of whether there is in actual practice proper targeting of the poor and the vulnerable.

MR. MATHAI: Well, I think in all countries targeting is a very difficult thing to do. Even in the very richest countries, targeting of subsidies is a difficult task and, no doubt, there’s scope for improvement in Sri Lanka. But I think what is quite certain is that some of these broader tax measures very clearly offer benefits to those who don’t need them, and that’s why we think that the elimination of these duty waivers is a reasonable step.

At the same time, there’s been discussion in the same vein that the government at the same time that they’ve removed these duty waivers, they have also reduced taxes on luxury vehicles and luxury goods.

QUESTIONER: No, no, I have nothing against that.

MR. MATHAI: Well, I wanted to raise that point because it’s been discussed a lot in the press. And one point to make there is that the main advantage we see in that is mostly in terms of revenue. I mean, in fact, many of those excises were so high that consumption fell sharply and revenues coming into the central government were extremely depressed. And by cutting those kind of excises, it’s not so much that it’s going to spur growth in and of itself, but it’s going to yield more revenues, which will then enable the government to spend on socially worthy things. That’s the sort of rationale we had in mind and that the government indeed had in mind, which we thought was quite reasonable.

QUESTIONER: To (inaudible) where do you think the government should focus on like in terms of development?

MR. MATHAI: Sorry, I didn’t hear you, Deepal.

QUESTIONER: Sure. Where should the government focus in like in terms of taking the country forward (inaudible) after the war (inaudible).

MR. MATHAI: Well, look, let me restrict myself to the area that I have some competence in, which is in macroeconomics. I think a key element is simply ensuring that macroeconomic conditions remain stable. The IMF isn’t a development agency like the World Bank or the ADB. Those agencies are more competent to talk about what sorts of projects are most needed, what sorts of capital and other developments will best boost growth. But what we can say is that a major contribution to growth is simply making sure that inflation and interest rates and exchange rates -- that all these basic macroeconomic variables remain stable, so that then there is an enabling environment for businesses to grow and to create jobs, and for welfare of ordinary people to increase. So that, we think, is a key thing.

And for that to be done, a critical thing that’s been proven in country after country is to make sure that the fiscal balance is kept under control. And that’s why we’re very happy to see what’s happening with the budget now and with all these other measures. Because we think it’ll be a contribution to macro stability over the medium and long term.

QUESTIONER: And vis-à-vis right now where we have been engaged on the budget (inaudible) actually as you spoke on a trickling down effect, but do you see that there is some benefits for the masses as (inaudible) spoke about.

MR. MATHAI: Well, like I said, I haven’t seen the specifics in the budget that was presented this afternoon. And I disagree with your premise that I was talking about trickling down. What I was saying rather is that if the macroeconomic variables are kept reasonable, and if the overall envelope of spending is reasonable given the revenues that are available, well, then that will mean that the economy overall can grow, that jobs will be created, and that everybody will benefit.

QUESTIONER: In the budget proposals (inaudible) it was forecast today, the government projects about 8 percent (inaudible) for the upcoming year.

MR. MATHAI: Right.

QUESTIONER: In your assessment about the macroeconomic stability do you think that this is attainable in your (inaudible)?

MR. MATHAI: I think an 8 percent deficit target is attainable. As I said, it’s not based on an unrealistic revenue forecast. It’s not based on an unrealistic capital expenditure forecast. It’s recognizing that we need to have a conservative revenue forecasts, it’s recognizing that there are infrastructure needs and being up front about that in the budget document itself. And it’s based on keeping many recurrent spending categories constant in nominal terms, so there are no cuts there, in nominal terms, but, as I said, economists usually think in terms of GDP. And in terms of a growing GDP, it does still yield some savings.

So I think, yes, it absolutely is attainable. Now we have to see what happens.

QUESTIONER: Yes, Koshy, don’t you think that the CBSL having both a repo and OMO, is it meaningful? Okay. The OMO offers the investor 8 percent. The repo offers the investor 7.5 percent. So naturally the investor will go and park his excess cash under the OMO.

MR. MATHAI:I don’t think it’s always that simple. I mean, I work on Maldives as well. They have both instruments there and sometimes you see banks going into instruments that you wouldn’t expect. It’s not always straightforward.

I would say standing facilities and active open market operations are both normal parts of monetary policy. The standing facilities determine the boundaries of the policy rate corridor, and market rates typically float somewhere in the middle of that corridor. It’s nothing that’s exceptional in Sri Lanka.

QUESTIONER: But you are paying high interest under the OMO.

MR. MATHAI: I think you have to look at the overall structure of rates. It’s certainly not like it was a year ago when rates were 17, 18, 19 percent. We’re now down in the 8 percent range. Whether there are particular --

QUESTIONER:Well, the argument is that, in any case, if the market has excess liquidity, they will be forced to park it under the repo umbrella, so why have an OMO where they’re going to give 50 basis points more?

MR. MATHAI: I think if there is so much excess liquidity, then the OMO rate would naturally come down as well. I mean, it’s a market, right? At the end of the day, rates are going to equilibrate. There may be some short-term reasons why rates -- where there are discrepancies in particular rates. But ultimately, things will converge to some kind of reasonable level, with market rates somewhere in the middle of the corridor defined by the standing facilities.

As I said, the main message here is that these are normal instruments of monetary policy and their functioning has not been particularly exceptional here, so it’s not a cause for concern.

QUESTIONER: Yeah. Just one question. Today when you announced about the third tranche disbursement you also said it was extended by one year. So what does that mean?

MR. MATHAI:The original program was approved in July of 2009, and it had a period of 20 months over which it was valid. And there were 8 different disbursements that were going to be released during that 20-month period from July of 2009 to sometime in the spring of 2011. And now, as you know, there’s been a pause in the program. There’s been several months where we’ve not disbursed money.

What we’re doing now is we’re saying, okay, we’re restarting the program. We’re disbursing money again. Rather than trying to complete the program, disburse all the remaining money in the original program period, let’s do what normally is done in IMF programs. It really is a typical practice of just taking the pause and extending the program. So we’re going to have more disbursements over a longer period. It’ll go into 2012 now.

And as I said, in this case it makes common sense as well. It’s not just the typical practice. It makes common sense because the government is now thinking about these more medium-term sort of oriented policies. So why not then have an IMF program that covers a little bit more of the medium term rather than just being a very short-term arrangement that was focused on building reserves up and protecting the short term. I think that’s the rationale.

QUESTIONER: The revised program, Koshy, ends in December of 2012, is it?

MR. MATHAI: It’s the middle of 2012.

QUESTIONER: Actually, I don’t know as to how you could answer this, but there will be something about the political platform today and day before yesterday, a lot of opposition parties are basically accusing the government, that the government budget proposals this year--actually that they were dancing to the tune of IMF, and they were trying to impress the IMF (inaudible) and not the country’s--what the country wish. How would you respond (inaudible)?

MR. MATHAI: I think this is something that is said in every IMF program in every country in the world! I can assure you that it’s simply not true. The policies that the government has laid out are very much the government’s own policies. And as I said earlier in response to another question, they have chosen the Letter of Intent as a vehicle to express some of these commitments, but they are really not anything that -- I can’t think, in fact -- I can’t think of a single item in the Letter of Intent which represents something that we’ve had a substantive policy disagreement about and we have said, no, we want you to do this, and we’ve negotiated with them to change the substance of their policies. In every example, these are policies that the government has presented to us as being consistent with their plans all along.

I think the best evidence I can give to you is the very fact that we had a pause in the program for so long. If what you said was true, then surely things would have been exactly as we would have wanted throughout the program period and we would have continued without any pause.

QUESTIONER: Subsequently, they have been dancing to your tune! That was (inaudible) the program was reaction.

MR. MATHAI: Well, no. Having been a party to those discussions, I can say that these really are proposals coming from the government and being received by us. If the proposal didn’t make sense, I’m sure we would have pushed back and said, well, we think you could do things slightly differently. But we’ve had the privilege here to work with counterparts who are putting forward policy proposals that are eminently reasonable, that make absolute sense and seem to be the right way forward.

QUESTIONER:Is there any link with IMF policy and Sri Lankan government foreign policy?

MR. MATHAI:Is there a link between?

QUESTIONER:Between IMF policies and Sri Lankan government foreign policy.

MR. MATHAI: No, there’s no link. The IMF staff and the Board restrict themselves to economic issues. It’s a straight economic issue.

QUESTIONER:Thanks, Koshy.

MR. MATHAI: Well, thanks to all of you for coming.
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