SL gets Middle Income Emerging Market status

By Sulochana Ramiah Mohan

The International Monetary Fund (IMF) has elevated Sri Lanka from the list of Poverty Reduction and Growth Trust (PRGT) countries, with effect from 11 January 2010.
Leading economist Geeth Balasuriya said, “At this point of time, Central Bank is giving more prominence towards fueling economic growth. We see them loosening the monetary stance by trying to keep rates low, so that credit demand, spending would increase. However, this might create inflationary pressure as we move on.”
“Enhancing the fiscal discipline is one of the strategies to counter it. Government must focus on cutting down revenue expenditure and other wasteful spending so that the budget deficit will be kept low,” he pointed out.
According to the new IMF positioning, Sri Lanka will now be recognised as a middle income emerging market. This elevation would facilitate Sri Lanka to project itself strongly in international financial and capital markets.
Balasuriya commenting on Deputy Central Bank Governor W A Wijewardene’s remarks said: “Sri Lanka’s Central Bank has created an average inflation of 11 percent and has to take the blame for impoverishing the people,” (in an article published in FEB last week). “The main reason Sri Lanka was burdened with high inflation over the last 15-20 years was because of the poor track record in relation to fiscal management. Short-term economic policies of successive governments in order to achieve their political objectives dragged the country’s economy down. So, if we are to maintain a healthy inflation rate, fiscal imbalances must be addressed.” FEB’s stock market correspondent was of the view that IMF’s decision has been made taking into account past performance in terms of Gross Domestic Product (GDP), Gross National Product (GNP) and Per Capita Income, mainly after Sri Lanka’s economy grew substantially in the past few years (especially in 2009). “It will help the government and private sector to access international capital markets at viable costs to finance growth.”
The market correspondent also raised questions pertaining to “Purchasing Power Parity”. He queried: “The high level of inflation witnessed during 2008/2009 meant that purchasing power has declined, despite the Per Capita Income growth. While the value of the Rupee has declined, it has not devalued substantially against the US$ due to the weakness of the latter against the Euro and gold. Has this figure been adjusted for Purchasing Power Parity?”
“Much of the employment generation and a certain level of economic growth were due to public sector growth. Is such employment and growth sustainable in the coming years?”
He finally questions whether the Central Bank’s Per Capita Income (which is an average figure relevant to the entire country), had given any special consideration to people in the North and East, who have just integrated into the national economy. One would find very low levels of income in former war-torn areas.
The Central Bank media release further quoted that a country graduates from PRGT only if it, (i) has enjoyed income per capita well above the International Development Association (IDA) threshold for a number of years, (ii) has the capacity for durable and substantial access to international financial markets, and (iii) does not face serious short-term vulnerabilities.
The Executive Board of the IMF has taken into account the following specific factors in considering Sri Lanka’s graduation.

i. The strong economic performance in recent years that has substantially lifted Sri Lanka’s per capita Gross Domestic Product (GDP) to US dollars 2,014 by 2008, well above the prevailing IDA threshold, and its per capita Gross National Income (GNI) has not been on a declining trend for the last 5 years. The strong growth performance has signalled substantial resilience to shocks, including shocks to oil prices, and to the expiration of the Multi-Fibre Agreement.
ii. The availability of an IMF Stand-by Arrangement facility as approved in July 2009 to cushion the impact of the global crisis. Further, the economic developments under the programme have been stronger than expected, with GDP growth expected to return to almost pre-crisis levels in 2010, while exports have been showing signs of recovery.

iii. The country’s public external debt being projected to decline gradually over the medium term. Although debt dynamics remain sensitive to currency depreciation and export shocks, the timely implementation of fiscal consolidation, as envisaged in the Stand-by Arrangement programme, will be crucial to ensure that the public debt remains on a sustainable path.

iv. The country’s ability to access international capital markets in the past years and its ability to meet the market access criterion. Oversubscription of the recently issued five-year sovereign bond reflected the progress made under the Fund-supported program, and signalled good prospects for continued access to international capital markets.