IMF impressed!

• Deputy Managing Director says no immediate and serious concerns on Sri Lanka but country needs to keep further improving macroeconomic fundamentals to manage medium term risks better
• Says 3Q GDP data points to economy doing pretty good but too early to revise upwards its forecast; post-war phase gives advantages and Sri Lanka could grow more
• Describes country resorting to foreign commercial borrowing as natural 
• Sees no immediate threat to debt sustainability but wants gradual dip in public debt; boosting of reserves via exports and policy buffer enhanced
• Welcomes commitment towards lowering budget deficit; urges measures to boost Govt. revenue 
• Prefers improvement in biz climate as vibrant private sector is key for sustainable development
• Says IMF is always ready to discuss support if requested

By Nisthar Cassim The International Monetary Fund (IMF) on Monday indicated things were fine with the economy and Government policies, but urged the bolstering of defences to mitigate risks while noting that the country has greater scope to grow smarter. In town for a two-day visit en route to Nepal, the IMF’s Deputy Managing Director Naoyuki Shinohara told a group of select journalists that recent third quarter data confirmed the economy’s growth was “pretty good” and that macro-economic stability was commendable. He said overall there was “no serious concern” in the short term. Despite the 7.8% rebound in the economy in the third quarter, the IMF retains the full year GDP growth forecast of 6.5%. Shinohara said it was too early to make any upward revisions. Asked whether he would describe Sri Lanka as remaining resilient despite external and internal shocks, the IMF Deputy MD said: “I am not sure if it is resilient. But given the end of the 30-year conflict and the post-war phenomenon, Sri Lanka is a special case and in a period of peace, Sri Lanka is enjoying fruits of peace and stability but there is more room for the economy to grow.” “Macro-economic indicators have been so far so good,” he said pointing to lower inflation, the GDP growth rate, stable exchange rate and narrowing of the current account. He also welcomed the Government’s commitment to lowering the budget deficit (to 5.8% of GDP in 2013), and being on that course in recent years. “There is strong commitment on the part of the Government to control the budget deficit. We are happy with that and would like to see continuity in 2014 Budget as well,” said Shinohara, during the interview at which IMF Resident Representative Koshy Mathai and Asia Pacific Deputy Division Chief Todd T. Schneider were also present. The visiting IMF team met with senior Government officials and the private sector and also toured Hambantota and Kandy during their two-day tour. He noted that there was greater scope to enhance Government revenue by broadening the tax base and improving collection and that the Government shouldn’t solely rely on expenditure side controls in reducing the deficit. Shoring up revenue is important for infrastructure development, the progress of which the IMF is happy about as well. He also welcomed price revisions by the CEB and CPC as part of addressing the losses. When questioned about the accuracy of data, he said the IMF goes by existing Government data and globally any data is always questioned. “When it comes to GDP calculation, it is complex yet it is an estimate and we have to go by what is available,” he added. He also said that internationally there have been calls for greater independence of central banks and that economic or monetary policy taking political implications into consideration is a global phenomenon. “Sri Lanka isn’t unique in that aspect,” Shinohara added. The IMF said that Sri Lanka’s preference to tap international commercial borrowings was natural as the country develops and opined that there was no immediate threat to debt sustainability. Shinohara said public debt of 80% of GDP was not alarming as there were economies with public debt of 100% or 120% of GDP. However, the IMF recommends a downward trend as part of improving macroeconomic fundamentals because there are always risks. “Borrowing to finance infrastructure is not a bad thing, but the Government needs to improve risk mechanism and do proper cost benefit analysis in addition to ensuring transparency,” he added. The importance of boosting reserves through exports was also stressed. The IMF Deputy Managing Director also said that Sri Lanka faces several risks in the medium term and ensuring better macro-economic fundamentals was essential. “It is important for Sri Lanka to strengthen policy buffer (including lower budget deficit and lower inflationary expectations) to meet any risks and improve macroeconomic stability.” Among medium term external risks he listed were a further slowdown in global economy and its impact on Sri Lanka’s exports and tapering policy by the US Federal Reserve. However, he noted that Sri Lanka has remained less vulnerable thus far, but with the country opening itself up for global capital markets, it needs to be watchful. Further reduction in the budget deficit and improving the business climate to empower the private sector were also listed as domestic challenges for Sri Lanka. “It is important for Sri Lanka to have a vibrant private sector for sustainable growth, as well as improved infrastructure,” Shinohara added. Noting that the IMF remained open to extend support and discussion, he said that the Sri Lankan Government hadn’t made any request thus far.