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A senior economist said the approval of the US$ 2.6 billion IMF facility has given foreign investors much confidence in investing in Sri Lanka as can be seen by the huge investment, amounting to almost US$ 1.2 billion, from a US-based hedge fund in government securities.
"Our economy was not doing well and we were heading for a crisis," Senior Economic Lecturer of the University of Colombo, Dr. Sirimal Abeyratne, said.
"But now, after the IMF approved a standby facility of Sri Lanka foreign investor confidence has grown," he told the Island Financial Review.
Dr. Abeyratne said foreign investors looked at two basic indicators before investing in a country; the Balance of Payments and the Budget, both of which did not give good signals.
"However, the IMF loan has built in confidence to the system and foreign investors know the IMF would be monitoring Sri Lanka’s progress on the macro-economic targets. This has created positive speculation on Sri Lanka, and added to the high rates of interest compared with most other countries, many portfolio managers would see Sri Lanka as a better place to invest," Dr. Abeyratne said.
Commenting further on the US$ 1.2 billion foreign investment in government securities, he said it was a good sign of things to come.
Some of the macro-economic targets as set of out in the Letter of Intent submitted by the Central Bank:
* The budget deficit would gradually be brought down to 5 percent of GDP by 2011. The target for this year is 7 percent of GDP although the government’s initial target was for a 6.5 percent deficit for the year. According to the Central Bank, the IMF has agreed to allow the deficit to reach 7.5 percent in the case of more donor led expenditure in reconstruction efforts.
* Tax revenue is expected to be increased by 2 percent of GDP by 2011 by widening the tax base. The government sources said this would not mean that existing tax rates would be increased nor new taxes introduced—the government is hoping to bring more payers under the tax net and strengthen the administration and collection of taxes.
* The government would also take steps to limit external borrowing from private markets to US$ 1.75 billion by 2011.
* The government has also committed itself to ensure that public enterprises are run efficiently with the CEB and CPC expected to breakeven by 2011.
* The government is also expected to allocate 2 percent out of it projected expenditure on provisions for humanitarian assistance and resettlement. By end 2009, the government is expected to resettle at least 70 percent of the IDPs, but Central Bank Governor Ajith Nivard Cabraal said it was only an indicative target.
* The Central Bank is expected to allow the exchange rate to be more flexible and continue with its monetary policy framework targeting inflation by controlling the growth of credit. The Central Bank has been able to relax its tight monetary stance as the rate of inflation continued to drop over the last few months.
