Sri Lanka raise interest rates after seeking IMF bailout
Sri Lanka’s central bank Friday raised benchmark interest rates for the first time in nearly four years by 50 basis points ahead of a possible IMF bailout.
The Central Bank of Sri Lanka raised its lending rate from 7.5 to 8.0 percent, saying that relatively cheap money had the potential to fuel demand-driven inflation that could undermine the fragile economy.
The previous rate increase was in April 2012 when it was increased by 75 basis points to 9.75 percent
Even before Friday’s rate increase, commercial banks had been increasing their lending rates by as much as two percentage points, anticipating a move by the central bank to tighten monetary policy to curb inflation.
“The monetary board (of the central bank) observed that, in spite of the recent policy measures… and some upward adjustments observed in market interest rates, certain risks to macroeconomic stability continue,” bank said in its monthly review of the economy.
The bank said year-on-year inflation climbed to a staggering 4.6 percent in January, up from 0.8 percent in 2015.
The rate hike came as Sri Lanka made a formal request for an IMF bailout package to aid its struggling economy after a sharp slowdown in growth and a widening budget deficit. Details of any bailout are yet to be finalised.
Sri Lanka enjoyed a blistering economic growth rate averaging more than 8.0 percent for two years after a prolonged civil war ended in 2009.
But the pace of expansion has since slowed, falling to 4.8 percent in the third quarter of 2015, according to official data.
Prime Minister Ranil Wickremesinghe told parliament last month that he was keen on negotiating an IMF bailout to deal with the fallout of a global economic downturn on his country of 21 million people.
The IMF, which sent a mission to review Sri Lanka’s economy earlier this month, said it had warned the authorities they should make a “stronger effort” to immediately reduce the budget deficit.
Sri Lanka sought an IMF bailout immediately after the new government took office in January last year but the fund turned down the request, saying the country’s reserves were at a comfortable level.
It received $2.6 billion from the IMF in 2009 to boost its financial reserves, which had dropped below $1 billion at the height of fighting between Tamil Tiger rebels and government forces.
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Regions with the highest rate of poverty in Sri Lanka are areas inhabited by Tamils, according to a study of the World Bank.
The regions come under the districts of Mannar, Mullaitivu and Kilinochchi in the Northern Province; Batticaloa in the East and plantations in Badulla district (Uva Province) and Nuwara Eliya (Central Province). One Sinhala-dominated region the study has identified as having a high rate of poverty is the Monaragala district.
Going by Sri Lanka’s national poverty line of about $1.50 per day (Purchasing Power Parity in 2005), the poverty headcount rates of Mullaitivu, Mannar and Kilinochchi are 28.8 per cent, 20.1 per cent and 12.7 per cent respectively.
If one were to apply the international poverty line of $2.5 per day, the figures in these three districts are 74.4 per cent, 60.9 per cent and 57.2 per cent respectively.
With respect to the estates, the poverty headcount rate is 10.9 per cent, as per the Sri Lanka’s national poverty line and this goes up to 50.6 per cent under the international poverty line.
Though the World Bank has not specifically given the figure of Batticaloa, a 2014 publication of the Department of Census and Statistics of the Sri Lankan government mentioned that the figure (as in 2012-2013) was 19.4 per cent.
As for the age profile of the poor in the North and East, the study points out that about 47 per cent of people living in poverty come under the group of below 25 years, compared to 40 per cent in other Provinces.
Lack of access to the labour market and high unemployment rates, particularly among the youth and among educated women, are the factors that have contributed to the prevalence of such high rates of poverty.
On the people in the estate sector, the World Bank’s report has said a large share of the population is “vulnerable to adverse shocks”.
Describing as worrisome the non-monetary indicators of health and nutrition in the estates, the document has pointed out that the estates have the highest maternal mortality rates in the country. “About 30 percent of children below 5 are underweight, nearly one in three babies born have low birth weight, and one-third of women of reproductive age are malnourished.”
The World Bank has called for the implementation of programmes aimed at improving market accessibility, incentives to promote entrepreneurship among educated youth and schemes to help ex-combatants and women-headed households. As for the estates, multi-sector interventions should be undertaken to improve nutrition outcomes, enhance job opportunities for the youth and prepare for a growing number of aging estate workers, the report has added.
How does WB define poverty. There is absolute poverty and relative poverty. According to the UN absolute poverty is defined as
`a condition characterised by severe deprivation of basic human needs, including food, safe drinking water, sanitation facilities, health, shelter, education and information. It depends not only on income but also on access to services.’
Sri Lankan government over couple of decades used poverty to foreign and the NGO’s joined the poverty bandwagon. I was associated with poverty alleviation program with a NGO and what I found then was that there was not an adequate crieteria to determine as to qualify the poverty line. Therefore whatever the government nor the NGO’s did was inconclusive.
So it is pertinent to know as to what surveys the IMF conducted to conclude that the north, the north east and the estate sector before they could devise strategies to alleviate poverty. The WB fails to address as to what the Government ought to do about it.
The employees of the plantation sector looks after its members welfare and the workers are guranteed 20 days employment, in addition they are expected to contribute to the EPF and holdiay wages. By law the employers are bound to provide these benefits.
According to the WHO malnourishment is monitored through
“Using weight-for-height: WHO and UNICEF recommend the use of a cut-off for weight-for height
of below -3 standard deviations (SD) of the WHO standards to identify infants and children as having SAM. The commonly used cut-off is the same cut-off for both the new 2006 WHO child growth standards (WHO standards)as with the earlier National Center for Health Statistics (NCHS reference). The reasons for the choice of this cut-off are as follows: ”
On paper these looks admirable unfortunately most of the results made available are fictitious
Land is limited whereas population growth is progressive. So finding employment with each succesive generations is problem is a universal problem and is apparent in the Mahweli settlement schemes.
Finally the poverty defined bu the WB for this study is relative at dollar1.50 a day is relative and another crieteria that was used was the minimum calorie intake something in the order of 2000.
The only means through which rural development can take place is through investment and not through handouts given by the government (samurdhi) or a host of NGO’s. Most of these handouts are running dry and little to show.