Sri Lanka is now heading for a major financial crisis...

Sri Lanka's foreign reserves have gone down to US$ 6,301 million in January 2016 from US $ 7,303.6 million. A bail-out package is necessary to prevent a financial crisis, a top economist said.



"Sri Lanka is now heading for a major financial crisis and our foreign reserves are available only for a few months and some form of a bail-out package is necessary to prevent a major financial crisis, former Central Bank Deputy Governor Dr. W. A Wijewardena said.
He said that with the current foreign reserves the country has to pay loans plus their interests, which amount to half of the reserves, and the balance amount is ample only for a few months imports for the country.
He said that given the current scenario, an IMF bailout package is inevitable to prevent a financial crisis in Sri Lanka.




Although the Central Bank sterilized about a billion US dollars from a sovereign bond sale in November, to increase foreign reserves to US $7.3 billion, money printed later to repay Treasury bills , made the situation more serious.When money is printed and credit expands to levels above the deposits raised by the banking system, the government finds it difficult to raise money to repay foreign debt.
Foreign reserves include the monetary reserves of the Central Bank and any forex balances of the government.About US$ 1.1 billion of the reserves are from a swap with the Reserve Bank of India. The bulk of a US $ 2.5 billion loan from the IMF has now been paid back and a payment of US$ 342 million has to be made in 2016.
According to published data, Sri Lanka's net international reserves fell to US$ 4,180 million in October 2015 from US $ 4,201 million in September. At the end of 2014 net international reserves were at US $ 6,517 million.
According to the IMF mission, the internal outflows are not alone in affecting the Sri Lankan economy since its growth comes against a backdrop of "Key risks for emerging market and developing economies which relate to a weaker global growth environment, market volatility, declining commodity prices, and tighter external financing conditions in the context of global re-balancing."

The mission pointed out that the nation has already taken steps to ‘move macro-economic policies towards a more sustainable path’. In its press release, the IMF mission commented on the market forces' greater role in determining the level of exchange in 2015.

Sri Lanka recorded an 8 percent growth for two years after the end of the war in 2009 but has since seen a fall to 4.8 percent in the third quarter of 2015.

The IMF mission that concluded their tour of Sri Lanka, complimented Sri Lanka on its recent positive economic performance.

"Real GDP growth of 5.2 percent in the first three-quarters of 2015 was achieved in the context of continued low inflation" it said, noting that most sectors have shown positive growth.
- Hiran H.Senewiratne