IMF cash on its way, tough road ahead for CB

Moreover, it can also create panic in the markets,” Sanath Manathunga, Managing Director / CEO, Commercial Bank told the Business Times recently. Noting that haircuts are complex exercises, he said the country should have a stable financial sector even after debt restructuring and the economic revival should be sustainable. He also said that debt restructuring will not have a direct impact on the depositors as it will only be an accounting entry on the banks’ books. “The banks have the resilience to take a dip in those investments. In the event of a debt restructuring, there will be an adjustment in IFRS accounting policy.”

Mr. Manathunga added that there should be some regulatory forbearance to absorb this day-one impact over a period so that banks' capital adequacy won't be impacted. “All banks, the central bank, and the government should manage miscommunications to the depositors and, stress upon the banking sector being resilient.” He also noted that IMF's base case scenario is relatively mild on the domestic debt restructuring. “For example, restructuring the T-Bill holding of the Central Bank into long-term bonds is an option. A selected pool of other domestic debt can also be considered for some sort of restructuring. If this happens, the impact on the financial sector and EPF will be minimal.”

Certain economists said that the newly secured loan is good. Saying it will unlock the borrowings to the private lenders and fund other projects coming from multilateral and bilateral agencies, they said that continuing with the IMF programme will improve government revenue, domestic utility prices etc.

“We are officially in a better position now that we have secured the required IMF loan package. Restructuring attempts for public enterprises will improve our internal finance position. We can also witness the stable macroeconomic fundamentals in the coming months, such as exchange rate stability, lower inflation, and lower interest rates,” Sirimal Abeyratne, Professor in Economics, the University of Colombo told the Business Times. However, he pointed out that all these are temporary. “The ability to misuse these by those in power and by those manipulating public opinion for their political gain are important determinants in the past and will play a significant role now as well. If such a situation arises, we may get into the same trap.”

Meanwhile, Secretary to the Ministry of Finance Mahinda Siriwardana pointed out that the IMF was not forced to come here, and it is important to get out of the ‘entitlement culture’ that has been the ethos for decades.

Dr. Abeyratne also noted that the loan package is not a panacea to bring the economy out of the rut as the country is faced with foreign debt and the forex crisis. “We need to get our export earnings in order. Without aggressive export promotions, Sri Lanka will not be able to achieve its growth target. It is critical to establish the required environment for the export promotion that's not in the IMF policy package.”