Economist Dr. Harsha De Silva, considered a bitter critic of the Central Bank, said the IMF standby facility of US$ 1.9 billion would in the short term help the country meet its foreign commitments and achieve its long term development goals while the main opposition party, the UNP, was opposed to the government’s interactions with the IMF.

"The IMF facility will ensure more fiscal and monetary discipline which will actually help the country reach its development goals," he told a seminar organised by the European Chamber of Commerce of Sri Lanka and the American Chamber of Commerce of Sri Lanka last Thursday.

With the deepening global economic crisis the country is finding it extremely difficult to raise foreign loans to pay existing commitments while reserves had been exhausted to maintain a stable exchange rate, according to dealers the Central Bank has not intervened aggressively for some time.

According to Central Bank data US$ 272.2 million was sold to commercial banks for the month of January 2009.

Foreign exchange reserves amounted to US$ 1.4 billion at the end of January barely enough to fund import bills for two months.

The expanding trade balance was finally curbed but only because trade is contracting world over because of the global financial crisis.

The trade account deficit contracted by 66.5 percent to US$ 207 million in January 2009 as against the deficit of US$ 619 million for the same month in 2008.

Export earning in January decreased by 11.6 percent.

Imports recorded a decline of 40.5 percent, largely due to the fall in oil prices, but the benefit has not been passed on to consumers as government has increased taxes on selected commodities such as milk powder.

Dr. De Silva said the country’s foreign debt payments could amount to about US$ 500 million during the year.

The Central Bank is entrusted with managing the government’s debt-stock and did not tell us what the payments for the year would ammount to.

"We normally do not calculate this as the figure is volatile with new loans coming in, like the IMF standby facility, and loans being settled," an official of the Central Bank told the Island Financial Review.

Sri Lanka Development Bonds which were expected to bring in US$ 200 million brought in about US$ 185 million. The Central Bank is also campaigning to raise US$ 500 million through special bonds issued to the Sri Lanka Diaspora.

Dr. De Silva touched on the exchange rate issue citing the Central Bank’s own estimates to show that the rupee was overvalued by more than 20 percent.

The country’s export sector has hit tough times with global demand dwindling and the artificial exchange rate is making survival even more difficult as it makes the country’s exports less competitive.

Dealers also said Central Bank intervention had to some extent caused a liquidity shortage notwithstanding the constraints on liquidity with a tight monetary policy.

However, as reported yesterday, the Central Bank has taken several steps to ease this situation.

However, in light of the foreign debt obligations of the country it would be better to keep the exchange rate as it is, but economists warn this cannot be sustained for too long, that an adjustment to the real exchange rate must be made sooner or later to maintain basic economic stability.

Another argument against depreciating the rupee against the dollar (which would happen if market forces are allowed to determine the rate based on supply and demand) is that it would cause inflationary pressure as Sri Lanka is an import dependent country.

However, with prevailing low global commodity prices economists say now is the best time to make the adjustment as it would not have a big impact on prices.

But government policy on the issue indicates that the country’s debt obligations are more important.

The Central Bank has allowed the rupee to slip to a certain extent and the bank’s Governor, Ajith Nivar Cabraal once said the Central Bank would follow a cautious approach with regard to the exchange rate so as to avoid undue shocks to the economy.

Because of the global financial crisis, the IMF was on the verge of bankruptcy, but now infused with fresh capital, it aims to assist countries facing financial risk in view of the global crisis. Its business is to lend and it is at its best interest to do so, economists believe.

"The IMF is going to impose conditions but not to the same extent as it used to before the crisis. It may not insist on privatization but technical conditions may be laid such as liberalizing the exchange rate," Dr. De Silva said.

"I think the exchange rate will gradually find its equilibrium," he said.

Trade Economist Razeen Sally, Co-Director of a think-tank, the European Centre for International Political Economy in Brussels, said now was the best time to approach the IMF for a loan.

"The IMF was almost bankrupt six moths ago, but now their resources have doubled. Now is the best time to go for a big IMF loan without conditions attached," he said.

Sally pointed out that the IMF would avoid imposing conditions on the micro-economy the way it used to in the past.

However, Sally said certain macro economic conditions might be imposed such as exchange rate liberalization, enhancing fiscal and monetary discipline and transparency.

Fitch Affirms John Keells Holdings at ‘AAA(lka)’; Outlook Stable

Fitch Ratings affirmed the National Long-term rating of Sri Lanka’s John Keells Holdings PLC (JKH) at ‘AAA(lka)’. Fitch has also affirmed the National Long-term rating on JKH’s senior unsecured notes at ‘AAA(lka)’. The Outlook remains Stable.

JKH’s rating reflects the diversified nature of its businesses, the currently strong financial profile driven in part by its high cash position (estimated at LKR10bn as of 3 March 2009 at the holding company),continued strong operating cash generating ability, and the dominant market share of some subsidiaries.

However, Fitch notes that JKH has yet to announce plans with regards to the deployment of its cash assets. Should these deployments be in long-term projects with aggressive investment schedules, as well as protracted projected dividend flows, JKH’s credit metrics can be expected to weaken over the medium term.

As such, Fitch notes that that there remains some probability of event risk with regards to JKH’s ratings -which the agency will continue to monitor and take necessary rating actions as warranted. Fitch expects JKH’s bunkering business (post FY08 margin erosion) and the Maldivian hotels segment to overcome operational restrictions faced in FY09 and provide more standard returns in FYE10. The agency also takes comfort from the expected contributions to JKH’s cash flows in the near term from the property sector (in FYE10) as well as the customary dividend flow from South Asian Gateway Terminal (SAGT) - the container handling associate of JKH group (increased ownership from 34% to 42% during FY09).

JKH has maintained its financial structure relatively well with significant equity issues (LKR13bn in FY07) leading to a strong balance sheet. In April 2008, JKH drew down on an USD75m debt facility from International Finance Corporation (IFC) with the option to use the funds for investments into new ventures. Part of these cash balances have been used to increase the group’s ownership stake in existing ventures (such as SAGT, Ceylon Cold Stores, Union Assurance and John Keells PLC) as well as to repurchase 4% of the shares outstanding in November 2008.

Key industry level challenges over the short term remain the expected slowdown in transshipment volumes impacting its transport segment, as well as the slowdown in tourism in the Maldives. Fitch also notes that the ability of the remaining property project to recognise its planned revenue and profits according to schedule may be somewhat pressured in the current environment. However, Fitch believes that these JKH ventures remain capable of providing adequate profitability in the near term even under these stressed conditions, based on dominant market position and past performance.

JKH reported revenues and EBITDA of LKR41.8bn and LKR7.7bn (excluding interest income) respectively for the financial year ended March 2008 and LKR31.1bn and LKR5.0bn, respectively, as at Q309. As of December 2008, JKH had a net debt position of LKR2.2bn and a gross debt position of LKR20.8bn, whilst the net interest coverage (fund flow from operations to net interest) was strong due to the significant interest income earned - LKR1.6bn for 9M09.

The holding company’s borrowings increased to 53.5% of total group debt as at December 2008 due to the IFC facility, although the company’s expected strong cash dividend receipts from its operating subsidiaries provide comfort at the holding company level.