Thursday, 26 September 2013 01:03
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Upgrades growth forecast marginally but calls for reforms; limited forex intervention, halt in monetary policy easing
By Kinita Shenoy
The International Monetary Fund (IMF) yesterday gave a mixed score card for Sri Lanka and its future prospects, following the completion of the Post-Program Monitoring Review.
The visiting IMF team said Sri Lanka’s economic growth estimate has been revised upwards to 6.5%, from 6.3% previously. However, this is still below the Central Bank’s optimism of 7.5% growth likely in 2013. The team also had a longer list of recommendations which will help Sri Lanka to better manage the challenges.
The IMF’s Post-Program Monitoring discussions were conducted by an IMF staff mission led by Todd Schneider. The monitoring discussions included meetings with Government and Central Bank officials as well as private sector representatives.
The IMF issued an official statement announcing its expectations for the country in the coming year, articulating that the financial system remains relatively strong despite a rise in Non Performing Loans. The slight downgrade was attributed to moderate credit growth, flat budget revenues and relatively low growth in non-oil imports in 2013’s second quarter, which makes it unclear whether the economic growth acceleration will continue into the second half of the year.
Schneider added that the current account deficit narrowed in the first half of 2013 and the balance of payments surplus is expected to widen this year.
In reference to the increasingly complex global environment, the statement affirmed that it would be essential to adhere to the flexible exchange rate regime that has been a core component of the policy since early 2012, while intervention should be limited to dealing with excessive short-term volatility.
Contingency plans, which have already been discussed with the Government and the Central Bank, include a mix of fiscal and monetary policies to counter potential negative shifts in market conditions.
Schneider and his team also mentioned that the possible tapering of the USFederal Reserve’s exceptional monetary stimulus in the coming months could cause a period of slowdown or perhaps even a reversal of capital inflows for emerging markets as investors pull funds fearing the scale back.
They added: “While the rupee has been relatively resilient so far, the balance of external risks for Sri Lanka has shifted to the downside.”
Schneider further raised concerns over the rupee currency which hit a record low last month, and the Central Bank’s intervention in the forex market in order to stabilise it.
Considering the possible risks facing Sri Lanka, the IMF urged policy makers to keep interest rates steady while the impact of recent easing is assessed. There was a further recommendation that any new external borrowing needs to be done with sustainability in mind, whilst ensuring that investments generate the resources needed to service these obligations.
Fiscally, weak revenues pose a considerable challenge. This could potentially be countered by reducing exemptions, broadening the existing tax base, and strengthening tax administration and compliance. The statement stressed that efforts to boost growth must be focussed on structural measures ranging from “tariff reform, enhanced revenue mobilisation to support capital expenditure and improvements in the general business climate”.
