The executive board of the International Monetary Fund (IMF) is expected to review the resumption and extension of a program with Sri Lanka on May 13, which was stalled last year, as the country missed targets, partly due to operation of a soft-pegged exchange rate regime.
The program will continue till June 2020, with a remaining 500 million dollars to be spread over three revenues.
IMF spokesman Gerry Rice said the “extension will provide additional time to the authorities to anchor macroeconomic stability and complete their reform agenda.”
Sri Lanka goes to the IMF frequently due to balance of payments troubles coming from the Central Bank targeting the interest rate (policy rate) and exchange rate (implicit and explicit convertibility undertakings) at the same time.
During the current program, Sri Lanka added explicit convertibility undertakings in the form of targeting a real effective exchange rate, halting disorderly adjustments in addition to the standard undertaking involving smoothening ‘excessive volatility’.
There have been calls to reform the peg and outlaw specific actions of the domestic operations department of the Central Bank which triggers monetary instability.
Under the IMF program, Sri Lanka has to peg with the US dollar to collect forex reserves, but the peg collapses when money is printed to stop rates going up.
Analysts have said that the lack of a ceiling on domestic assets of the Central Bank as a performance criteria, allowed the peg to go to the weak side of the covertbility undertakings.
Instead, a wide inflation target was given, which allowed the Central Bank to operate a de facto inflation targeting framework, with a peg, which is an oxymoron by definition, leading to monetary instability.