Lanka growth to dip below 7.5% – IMF

Tuesday, 6 March 2012 00:39 - - {{hitsCtrl.values.hits}}

Reuters: The International Monetary Fund (IMF) on Monday forecast Sri Lanka’s economic growth would cool to less than 7.5% due to its tighter monetary policy and currency depreciation measures, aimed at cutting the trade and current account deficits.

The global lender has withheld the last $800 million left in a $2.6 billion loan program since September, after the central bank refused to adopt a more flexible rupee exchange rate policy.

Sri Lanka spent $2.7 billion in the second half of last year trying to support the rupee. It gave up that policy on Feb 9 and at the same time raised interest rates for the first time since 2007.

“The IMF was estimating the growth at 7.5% for this year. I think it will be something below that with these policy measures,” IMF Resident Representative for Sri Lanka Koshy Mathai, told Reuters in an interview.

Sri Lanka’s economy is estimated to have expanded by a record 8.3% last year compared to 8 percent in 2010 and the central bank has forecast growth to cool down to 8% this year.

“We have seen them taking good policy steps. We think those are right policies to make the economy grow in a sustainable way. We are working towards and hoping we can recommend the release of next tranche,” Mathai said.

“Whether the government takes the money at the end of the day is their decision,” he said.

Fitch and Standard & Poor’s rating agencies last week warned Sri Lanka that its sovereign credit rating was at risk due to a weak external position and the depletion of its foreign currency reserves to protect the rupee.

Along with allowing more than 6 percent depreciation, the Sri Lankan government also raised fuel prices between 9-50% and electricity by as much as 40%, spawning sporadic protests.

A record trade deficit of $9.7 billion that resulted in huge current account and balance-of-payments deficits compelled the central bank to take policy measures to discourage imports.

“The exchange rate depreciation will, at least with a lag, benefit the economy by boosting the export- and import-substituting sectors and helping to create more jobs in those sectors,” Mathai said.

“The challenge will be making sure the policies remain flexible,” to ensure the current account deficit comes down and foreign exchange reserves are maintained, Mathai said.

Despite high credit growth, Mathai said the IMF has still not seen signs of overheating in the economy yet and “would probably not recommend a monetary tightening purely on domestic economic grounds.”