ECONOMYNEXT – Sri Lanka’s central bank’s ability to repay the International Monetary Fund needs to be monitored, the Washington-based lender said, as the country’s foreign exchange reserves have plummeted and the agency has been left with net debt .

The central bank owes the IMF about US$1.3 billion from the latest Extended Financing Facility or US$903 million in special drawing rights.

“While outstanding credit and payments due are not large and Sri Lanka has maintained a strong track record of debt repayment, its precarious reserve position, over-indebtedness, as well as persistent funding shortfalls fiscal and BoP pose high risks to Sri Lanka’s ability to repay the Fund,” the IMF said in a staff report.

The loan represented about 1.5 percent of GDP and was below the level that requires post-program monitoring.

The central bank must pay the IMF US$114.5 million in 2022. From 2022 to 2029, an average of US$170 million per year must be paid.

The central bank also owes money to domestic swap counterparties, Reserve Bank of India, Bangladesh Bank. According to the latest available data, reserves were negative at US$3.2 billion.

The central bank borrows money because money printed under “flexible inflation targeting”, involving unanchored policy, leads to currency crises and currency shortages.

During the last program, the central bank printed large volumes of money by organizing circles around a “monetary consultation clause”.

The program did not have a monetary reserve target or a floor on national assets to control economists who wanted to print money under the guise of “monetary policy independence.”

During the program, attempts were made to legalize discretionary monetary policy through “flexible inflation targeting” and also to compensate leaders through a new law.

Flexible inflation targeting (a discretionary domestic anchor) has been complemented by a discretionary soft anchor or an unworkable intermediate regime called “flexible exchange rate”.

The flexible exchange rate is now collapsing sharply. (Colombo/March 26, 2022)