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Sri lanka News – Sri Lanka has to prepare a 2023 budget, market determine the exchange rate to get funds while working with creditors in parallel to restructure debt, International Monetary Fund officials said.

“This is the beginning of a long road for Sri Lanka to emerge from the crisis,” Senior Mission Chief Peter Breuer told reporter in Colombo a 2.9 billion US dollar IMF deal was reached.

“It is important to continue on this path with determination. It is important to get support from all sections of society.”

Sri Lanka will have to negotiate with creditors to get assurances on restructuring and work on a series of prior actions in parallel.

These include a 2023 budget in line with the program.

Sri Lanka has allowed interest rates to go up and private credit has fallen sharply reducing outflows. However forex shortages still persist amid an inconsistent peg.

“An important pillar is to restore a market determined exchange rate,” Mission chief Masahiro Nozaki said.

“We believe it needs to be sequenced. The announcement of a comprehensive program will be important.”

Under the IMF program Sri Lanka is expected to show a primary surplus of 2.3 percent of GDP by 2024 correcting from an expected -4.0 percent in 2022.

Sri Lanka will have to make income tax more progressive and also charge wealth tax, to reduce the burden of adjustment on the poor, Nozaki said.

“Tax reforms under the program should be designed to be progressive,” he said. One way was to increase income tax rates and another was a wealth tax.

“Preparation will take time and that needs to be properly designed,” he said.

Sri Lanka will have present a 2023 budget consistent with the IMF program, which usually happens in November.

In parallel negotiations will have to be done with creditors. Without creditor assurances the staff level program will not go to the Board for disbursement.

“Delays in getting financial assurances will affect debt repayment capacity because Sri Lanka will not be able to grow,” Breuer said.

“The interest of everyone should be to get everyone to work together.”

Delays in getting creditor assurances would make the economic crisis deeper and delay a recovery.

The central bank will also have to get inflation under control.

“The disinflation strategy is critical under the program,” Nozaki said.

Sri Lanka’s inflation topped 60 percent in August after the soft-pegged rupee collapsed from 200 to 360 to the US dollar weighed down by a forced sale requirement after two years of money printing.

Sri Lanka’s rupee has collapsed from 4.70 to 360 to the US dollars since the soft-peg was set up in 1950. The ongoing 2020/2022 currency crisis is the worst in its history.

In Sri Lanka money is usually printed to keep rates down and buy maturing debt from past deficits to the balance sheet of the central bank. In 2020 price controls were imposed to cripple bond auctions after cutting taxes.

Later in the crisis after forex shortages are created large volumes of bill are bought with printed money to offset liquidity shortages from forex sales. (Colombo/Sept01/2022)

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