The International Monetary Fund has assessed that there has been “sufficiently strong progress on the debt restructuring” for a review of Sri Lanka’s program by its board on June 12, an official said.

The authorities have been holding extensive discussions with external official creditors regarding an MOU with the official creditor committee and the final agreements with the Export-Import Bank of China,” IMF Communication Director Julie Kozack told reporters in Washington.

“Discussions with external bondholders continue with the aim of reaching agreements in principle soon. Negotiations with the China Development Bank are also at an advanced stage.

“There is a strong expectation that agreements with external commercial creditors consistent with program parameters will be reached soon.

“So overall, we assess that there has been sufficiently strong progress on the debt restructuring front.”

Sri Lanka has also made progress on restoring stability and meeting IMF targets.

“In Sri Lanka, we do see macroeconomic policy reform starting to bear fruit,” Kozack said.

“Commendable outcomes include rapid disinflation, robust reserve accumulation, and initial signs of economic growth, while preserving the stability of the financial system.

“Program performance is strong, with most quantitative and structural conditionality for the second review met or implemented with delay, and reforms are still ongoing in some areas.

“The next steps on the debt restructuring are indeed to conclude negotiations with external commercial creditors and to implement agreements in principle with the official creditors.

“The domestic debt operations are largely completed. Debt restructuring discussions are continuing.”

Sri Lanka has regained monetary stability, and inflation, as measured by the island’s Consumer Price Index, has halted its increase.

Since then, private companies have largely been engaged in deleveraging, and the central bank has generally run a deflationary policy to build reserves (selling sterilization securities to banks).

Going against past practice, the central bank has also allowed the rupee to appreciate while collecting reserves through an ad hoc pegging mechanism (under a clean float, reserve collection is not possible).

The central bank has so far not cut rates and has enforced them by printing money, claiming that historical 12-month inflation is low (flexible inflation targeting), real interest rates are high (a frequent claim made by inflationists restating the same doctrine in a different way), or that there is a potential output gap that can be bridged by printing money.

All rate reductions so far have been achieved through actual domestic credit developments and the confidence created by the central bank itself by maintaining monetary stability and not engaging in restructuring all domestic debt and spooking all government securities buyers.

Sri Lanka’s monetary operating framework, which has since been legalized in a new law, is likely to lead to external instability in the future as soon as private credit recovers, analysts have warned.

In a series of currency crises since the end of the war, the central bank has printed money, citing low inflation, and undermined the currency through ‘exchange rate as a first line of defense’ to avoid market pricing rates, critics say.

The IMF’s ‘reserve adequacy metrics’ and the ‘exchange rate as a first line of defense’ are directly contradictory doctrines, which are on a collision course whenever short- or long-term rates are enforced with overnight term, outright injections, or non-penal rate standing facilities, critics have said.

Source -Economynext