Happy IMF wants happier Sri Lanka

Friday, 4 February 2011 00:57 -     - {{hitsCtrl.values.hits}}

By Uditha Jayasinghe

  • Releases $ 216.6 m fifth tranche under $ 2.6b SBA
  • Says biggest risk is any deviation from outlined Budget 2011 policies
  • Urges flexible exchange rate unperturbed by inflation but asks CB to watch out
  • Wants FDI to increase and says it will stay till the Govt. tells otherwise

Continuing with its optimistic tone about Sri Lanka’s economic progress, the International Monetary Fund (IMF) yesterday urged the Government to implement its proposals and insisted that any deviation would be the greatest risk that they could expect at the moment.

IMF Representative for Sri Lanka and the Maldives Dr. Koshi Mathai told media at the official announcement of the completion of the fifth review under the stand-by arrangement for Sri Lanka that saw the approval of a US$ 216.6 million tranche disbursement that the biggest fear for the country was the non-implementation of the Budget proposals.He also stressed that there was no need for the Central Bank to make policy adjustments in the face of current inflation levels, but urged that they monitor the situation so that second level inflation of salary hikes and higher production costs would not materialise.

Putting the current escalation of prices to supply shocks he insisted that this was not a sign of the economy overheating as a result of demand outstripping supply.

The only hiccup was two “technicalities” where the IMF Executive Board also approved waiver of applicability of the end-December performance criterion on net domestic financing for which data are not yet available.

Dr. Mathai elaborated that the belief was that Sri Lanka had met this target but since statistics to confirm that are available they had to request for the waiver. The other was the waiver of the non-observance of the end-December performance criterion on net international reserves.

The IMF Representative also pointed out that growth of Foreign Direct Investment (FDI) was “critical” for Sri Lanka and that it should happen within this year, though he was reluctant to give a timeline. The remainder of the stand-by agreement disbursement will continue with five more tranches scheduled to be released by the end of the first quarter of 2012.

“Overall we are very upbeat about Sri Lanka’s progress. Even though there are inflation concerns and our growth estimate of 7% is slightly more conservative that the Government figure of 8.5% we believe that there is strong reason for confidence,” Dr. Mathai noted, reiterating the IMF stance that was released in a press statement.

“Monetary conditions are stable and credit has picked up. With few signs of demand driven inflation pressures, the policy stance remains appropriate, but the Central Bank should be ready to act to head off any emerging inflation risks. The Central Bank has been building up reserves while allowing the exchange rate to appreciate. Looking ahead, however, the exchange rate will need to be sufficiently flexible in both directions to safeguard external stability,” the statement said.

Dr. Mathai added that exchange rates should be more flexible and that reforms should focus on further strengthening the financial system and expanding funding options for the private sector, including through a deeper bond market and a revamped legal framework for pension funds. Dwelling on the latter, he explained that the IMF was seeking further clarification from the Government.

Responding to questions by the media regarding comments made by Senior Minister Dr. Sarath Amunugama saying IMF assistance was not needed, Dr. Mathai, while professing he was unaware of the comments, emphasised that the Government indicated that it found the organisation “helpful” and until anything to the contrary was expressed, it would remain in Sri Lanka.