Sri Lanka Eco-Friendly Hotel in Sigiriya!

A 650 million rupees eco-friendly hotel will be build in Sigiriya in central Sri Lanka by Union Resorts and Spa Ltd, the state investment promotion agency said.

“Recent improvements in the trade and current account balances notwithstanding, Sri Lanka remains vulnerable to external shocks,” the IMF’s executive board said following report by a mission which engaged in annual Article IV consultations with the country.
“Medium-term sustainability will depend on maintaining an outward orientation, diversification of the export structure, and a judicious use of foreign borrowing—particularly given the rapid increase in debt servicing costs that have accompanied the shift from bilateral concessional debt to new loans on commercial terms.”

A Market Access Debt Sustainability Analysis (MAC-DSA) of Sri Lanka by the IMF has found that Sri Lanka’s debt sustainability was sensitive growth and foreign exchange shocks.

“The staff urges caution with respect to external borrowing through the banking system.”

Sri Lanka is recovering from a balance of payments crisis in 2011/2012 triggered by high credit growth and weak credit over the past year has allowed the Central Bank to collect reserves by purchasing dollars to prevent the rupee from appreciating.

Amid weak credit and foreign reserve collections, the external current account deficit had also declined over the recent past.

In 2011and 2012 the current account deficit expanded as strong credit was given a further boost through central bank credit of equivalent about two billion US dollars (printed money) which was used to sterilize forex sales and keep interest rates down.

Inflation

The IMF said current monetary policy was appropriate given weak credit and low inflation.

“However, the overall picture is complex and requires close monitoring,” the IMF said.

“On the one hand, with economic activity apparently on the rise and private credit (outside of pawning activity) beginning to show signs of recovery, the authorities should be ready to adjust rates as needed to ensure price stability—particularly given the long lags involved in monetary transmission.

“On the other hand, the current low inflation environment and the apparent change in inflation expectations offers an opportunity for a downward shift in the interest rate structure that might benefit the investment environment (and borrowing costs) over the medium term.

“Given the mix of signals, a cautious approach is warranted and the staff believes policy rates should remain on hold for the near term.”

The IMF also urged the government to collect more taxes from the people to be able to repay its debts, saying there was limited to room to cut spending given infrastructure needs.

But other analysts have said Sri Lanka has a bloated state with large state worker cadre including the military compared to workers in productive sectors as well as loss making state enterprises where there is room for improvement.

In recent years the Treasury has been able to cut overall spending as a share of gross domestic product, while keeping up capital spending and reducing the overall deficit though concerns have been raised about borrowings through government guarantees.

Sri Lanka is also targeting an overall reduction in debt in the medium to about 65 percent of gross domestic product from the current 80 percent levels.

Exchange Rate

The IMF mission to Sri Lanka believed that there was room to “take another look at the medium- and long-term strategy for debt reduction, and consider a more ambitious debt target (more strongly associated with reduced vulnerability) over a longer time horizon.”

The Central Bank was also urged to keep the rupee flexible.

In the recent past authorities have prevent the rupee from appreciating despite weak credit growth in bid to collect foreign reserves.

Staff’s analysis indicates that the exchange rate is broadly in line with fundamentals, and staff saw merit in central banks’ purchases to build its reserves, which remain on the lower end of most reserve adequacy metrics,” the Executive Board said.