Sri Lanka bad budgets, hot borrowings, dollar peg has endangered economy: IMF

Nov 01, 2008 (LBO) – Sri Lanka has to change its ways to protect itself from the negative effects of bad budgets, foreign borrowings, and a 'de facto' dollar peg of the rupee, the International Monetary Fund has said. The IMF's executive directors, in an annual assessment of the island, said the economy and the national currency were threatened by foreign hot money brought into finance the budget deficit, which could reverse at any time.

"Directors noted the risks of public debt distress arising from the increasing reliance on dollar-denominated, short-term commercial debt," the IMF said in a statement after its annual 'Article IV' consultations.

"Directors took note of the staff's assessment that the real effective exchange rate of the rupee is overvalued, and that the de facto peg risks contributing to external instability by attracting speculative inflows that could reverse quickly."

Hedge funds that financed Sri Lanka budget deficits in 2007 and early 2008 to the tune of 600 million dollars are already pulling out, and the country's reserves have fallen to 2.6 billion dollars from 3.4 billion dollars two months earlier.

According to Sri Lanka's own real effective exchange rate (REER) index, the