IMF wants Govt. to be more flexible

Friday, 3 February 2012 23:37 - - {{hitsCtrl.values.hits}}

By Uditha Jayasinghe

Even as the Central Bank raised rates, the International Monetary Fund (IMF) yesterday called for flexible policies to reduce credit growth, boost exports and contain the widening trade deficit.

Time to leave?

IMF staff mission leader Dr. Brian Aitken and his successor Benedict Bingham (in the background) leave their seats after the media briefing yesterday, prior to departure after their 10-day long engagement with the Government and other stakeholders on the $ 2.6 billion Stand By Arrangement – Pic by Daminda Harsha Perera

The IMF staff mission led for the last time by Dr. Brian Aitken told media that while they were happy with the economic growth, as a side effect of it the twin challenges of widening current account deficit and credit growth needed to be contained.

He noted that it was a key focus during discussions with the Central Bank and the Government and insisted that the former should use all tools to deal with the situation.

“We need to see the Government taking action to maintain flexible monetary policies and a sustainable current account deficit going forward. The Central Bank must make use of all its instruments to tighten credit growth. We have seen a change in the stance of the Government regarding flexible foreign exchange rates, which is a step in the right direction, but policies need to act nimbly to rectify the present situation,” he said.

Dr. Aitken was optimistic about the 3% depreciation that was done by the Government in November, but urged greater flexibility.

The Central Bank has spent nearly US$ 1 billion to defend the rupee and this together with a high trade deficit has resulted in reserves dipping.

In the Stand-By Agreement it was specified that Sri Lanka could not let its reserves dip below 3.5 months of imports, but Dr. Aitken pointed out that this had been the case in December, resulting in the need for the Central Bank to increase rates.

“The discussion focused largely on the Government’s strategy to address the external imbalances that emerged in the second half of 2011 and ensure that the economy’s recovery continues without undue disruption. There was broad agreement that a decisive policy response was needed to put the economy on a sounder macroeconomic footing, especially given the current uncertain global environment.”

The IMF also stated that it was encouraged by the monetary policy adjustments as well as the strong commitment by the Government to further reduce the budget deficit to 6.2% in 2012 and address losses of key State-owned enterprises.

So far six IMF reviews have been completed, $ 1.8 billion disbursed with $ 800 million remaining. The IMF expressed positive sentiments about the growth in exports and remittances and highlighted the fact that the Government, unlike in 2009, had the policy space to deal with the challenges faced at present.

“The global economic downturn has not yet affected Sri Lanka and we see that key exports such as garments have gone untouched.”