* Harsha says US$ 2.6bn facility badly managed
The International Monetary Fund (IMF) has asked the Central Bank to clarify recent comments made by the bank’s Governor regarding the interest rate on the US$ 2.6 billion standby arrangement facility (SBA), pointing out that exceeding the quota would not mean the entire loan carried a 3.1 percent interest rate.
Central Bank Governor Ajith Nivard Cabraal had told media through a faxed statement that if the country took on the remaining tranche amounting to US$ 800 million, the entire facility would incur an interest cost of 3.1 percent.
"Further, as of now, the interest applicable on the SBA outstanding amount of US$ 1.7 billion is very reasonable at around 1.1 per cent per annum. However, if further tranches were to be obtained under the current IMF SBA, the entire loan will attract as interest rate of an additional 2 per cent, which will make the loan a lot more expensive," Cabraal had told media as reported in these pages yesterday (30).
However, The Island Financial Review learns that the IMF had yesterday notified the Central Bank that this was not the case, prompting the Central Bank to send the following clarification:
"The IMF approved a SBA of SDR 1.65 billion (equivalent to US$ 2.6 billion) in 2009, which is equivalent to 400 percent of the country’s current quota with the IMF. So far, Sri Lanka has received seven tranches amounting to US dollars 1.7 billion under the SBA and this is still lower than 300 percent of the quota. The applicable interest rate for the loan is SDR rate (SDR, special drawing rights, rate is calculated every week and published on IMF website, which is currently 0.1 percent) plus a fixed margin of 1 percent p.a. for disbursements up to 300 percent of the quota. Therefore, the interest charge for the present outstanding of US$ 1.7 billion is 1.1 percent p.a. However, if the disbursements exceed 300 percent of the quota, a surcharge of 2 percent will be added on top of the present interest rate for the credit outstanding above 300 percent."
This means that exceeding 300 percent of the quota will not mean the entire US$ 2.6 billion would incur an interest cost of 3 percent as Cabraal had said it would.
Opposition lawmaker and deleted Economic Spokesman Dr. Harsha De Silva told The Island Financial Review that he realised the Central Bank’s "misleading comment" after reading the Governor’s comments in these pages yesterday.
"I then spoke to IMF Sri Lanka Resident Representative Dr. Koshy Mathai and I understand the IMF had corrected the Central Bank on this matter," he said.
"The US$ 2.6 billion standby arrangement facility has been badly managed by the Central Bank. The IMF has been clear that it would not release anymore tranches unless the Central Bank changed its exchange rate policy, so to save face the Central Bank has said it did not need the remaining tranche of US$ 800 million. The governor also tried to justify this by stating that the interest rate was too high and wrongly inferred that the entire loan would be charged at 3.1 percent. Even if this was true, it is still not bad because borrowing from international markets would carry an interest rate of over 6 percent and so-called friendly nations like China are also charging us in excess of 6 percent for its loans.
"The Central Bank is borrowing dollars only to waste it on defending an indefensible rupee. This cannot be sustained for too long. The Central Bank would have to allow the rupee to reflect reality, in terms of the widening trade deficit, and also allow interest rates to go up to curtail credit demand," Dr. De Silva said, echoing similar sentiments recently expressed by Treasury Secretary Dr. P. B. Jayasundera.
US$ 1.56 billion was used up from the reserves to artificially prop up the rupee during the four month period July to October 2011. According to dealers, a further US$ 1 billion has been sold to-date since the rupee was depreciated by 3 percent in November 21. By end November 2011 reserves stood at US$ 6.2 billion, down 30.6 percent from US$ 8.1 billion in July, with the borrowed component now becoming more significant as the reserves diminish, shrinking the comfort zone.
According to our calculations, for the past one and a half months, the Central Bank has pumped in a total of almost Rs. 300 billion to ease the rupee liquidity tightening which was caused by the dollar sales. The drain on rupee liquidity has resulted in some banks finding it difficult to maintain favourable overnight balances.
Fitch Ratings agency also said the loans-to-deposits ratio of the banking sector was falling with smaller banks reaching 100 percent, an indication that liquidity was tight.
Constant selling of dollars to prop the exchange rate and simultaneous domestic liquidity tightening are signs of pressure on the balance of payments, economists point out. History is repeating itself, although to a lesser degree, where in 2008 a similar situation prevailed; the Central Bank was selling dollars to defend the exchange rate and liquidity was tight. A spike in global commodity prices made things worse and the country had to seek IMF assistance.
The only hope so far is the near US$ 27 billion inflows ‘expected’ later this year. Cabraal has told The Island Financial Review that foreign inflows would materialise by this quarter which would significantly ease the pressures on the balance of payments.
"If tensions in Iran get out of hand and oil prices surge again we could find ourselves in another tight spot. Reserves must be kept for a rainy, not expended in their millions each day just to satisfy the misleading notion that a stronger currency was best," an economist said.