IMF floats over Sri Lankan floods

• By Uditha Jayasinghe

Despite higher commodity prices and extra expenses for flood relief the International Monetary Fund (IMF) yesterday ruled out a major impact and insisted that their programme targets would not be reviewed in the short term.

The IMF mission led by Dr. Brian Aitken was in Sri Lanka to conduct discussions for the sixth review of the US$2.5 billion Stand-by Agreement. During a press conference he stressed that the Sri Lankan government felt that it would be "premature" for the targets to be revised and the IMF was concurring at this point.

He admitted that there would be a "modest" increase in the cost of living which will peak during the middle of the year but expressed optimism of the targets remaining the same if the weather returned to normal. Referring to the Rs.50 billion damage estimates and the government spending Rs.30 billion on flood relief he pointed out that these would be relocated funds and not extra expenses incurred by the government.

"It is too early for flood numbers to be finalised so we agree with the government that this is not the time to adjust our projections," Dr. Aitken explained adding that they were still working with other stakeholders such as the Ceylon Electricity Board (CEB) and Ceylon Petroleum Corporation (CPC) to meet the targets set out in the IMF programme.

A statement released by the IMF reiterated this fact, "recent flooding has significantly damaged Sri Lanka’s harvest of various crops including rice and vegetables as well as rural infrastructure. Any effect on food prices is likely to be temporary and given the strength of the Sri Lankan economy, the overall impact on output growth should be limited."

The statement noted that inflation has increased but insists that credit growth is in line with earlier projections, the property market remains subdued and other signs of demand-driven inflationary pressures are not evident.

"Against this background our assessment is that current monetary conditions are appropriate for supporting the economic recovery. Remittance inflows continue at a high rate and reserves remain at comfortable levels, but the trade deficit is widening as imports recover from their sharp decline in 2009. We continue to believe that the exchange rate should retain the flexibility to ensure that reserves remain healthy and that the economy is competitive."

Performance against the end-December targets was satisfactory; with the 2010 budget deficit likely to have been held within the target of 8 percent of the GDP, IMF said. It also added that the structural reform agenda is also broadly on track. The net shortfall of net international reserves against the end-2010 target was justified by a larger-than-expected pay down of some public sector foreign exchange liabilities, the IMF stressed. The IMF forecasts 2010 economic growth to be 7.75% as well.

In response to questions Dr. Aitken replied that the fiscal policy implementation has improved marginally over the last year and the near final data that we have shows that the deficit target has improved. We believe that foreign reserves should be generated from the local economy in the long term and so far Sri Lanka has managed to almost meet our targets excluding the Stand-by agreement funds," he said.

The review team returns to make a report that will be evaluated and the third tranche should be released before mid-April at the latest, Dr. Aitken stated. The next tranche is expected to be US$ 217 million.

BOI legislation to be finalised in April

LEGISLATION to restructure the Board of Investment (BOI) could be finalised by April stated IMF Mission Chief Dr. Brian Aitken yesterday.

He told the media that the government was currently drafting out the legislation that would enable the restructuring to take place and it is expected to be passed by April. While refusing to speculate on what the specifics of the legislation might be he nonetheless noted that the overall idea and direction of the restructuring was in line with IMF expectations. Plans to restructure the BOI were announced last year with specifications being included in the Budget 2011 and the IMF programme. Dr. Aitken emphasised that the economy needed much higher levels of foreign investment but was reluctant to give a timeframe for its appearance. He urged for the private sector to become a much bigger player than it has been so far to reach this end and encourage foreign direct investment into Sri Lanka.