Flexible forex for competitiveness

While commending Sri Lanka’s overall economic conditions, the International Monetary Fund (IMF) yesterday called for more flexible exchange rates to encourage foreign investment to keep the country competitive.  

Releasing a statement from Washington at the conclusion of the Fifth Review of the US$ 2.5 billion Stand-By Arrangement, the international monetary organisation was upbeat about Sri Lanka’s prospects and reiterated that it was on target to bridge deficit and perform crucial tax reforms.

“We continue to believe that the exchange rate should retain flexibility to ensure that the economy remains competitive,” the statement remarked, adding, “Overall economic conditions remain strong, with GDP likely to grow by around 7.5 per cent this year. Inflation has risen, but this appears to be driven mostly by food prices, and credit growth is picking up as expected, suggesting that the current monetary policy stance remains appropriate.”



It pointed out that the trade deficit was widening as imports recover from their sharp decline in 2009, but remittance inflows continue at a high rate and reserves remain at comfortable levels.

“Performance under the programme is good, with all end-September performance criteria met. Monthly budget results to date are encouraging and suggest that the 2010 deficit target of eight per cent of GDP is within reach. The authorities’ structural reform agenda under the programme also appears to be broadly on track,” stated the press release.

The IMF also commended the Budget for targeting further deficit reduction along with substantial reforms to the tax system and the investment promotion regime, in line with the authorities’ policy commitments.

“The tax reform simplifies the system, reduces many rates and broadens the base. The net revenue impact is expected to be substantially positive, though some uncertainty is unavoidable with such an extensive set of policy changes.”

Sri Lanka’s attempts to improve foreign direct investment were also praised, but full implementation was urged.

“The new approach to investment promotion, if fully implemented, involves a shift away from tax concessions as the principal tool for attracting investment as well as an increase in transparency. No doubt, further progress on these and other fronts will be needed to ensure an acceleration of growth and a transformation of the economy, but the reforms announced in the budget are welcome steps.”

The statement continued: “While challenges remain, the authorities have made substantial progress toward fiscal and external sustainability. The IMF team has now returned to Washington to consult with IMF management and will monitor developments with the aim of holding an Executive Board meeting on the Fifth Review.”

Inflation hits 7% but no change on policy interest rates: CB

Despite year-on-year inflation hitting 7% at the end of November, the Central Bank yesterday decided to keep its policy interest rates unchanged and pledged to take appropriate steps if any demand pressures were noticed in the economy.

“Driven mainly by supply side constraints in respect of several commodities, year-on-year inflation increased to seven per cent by end November 2010. Food and non-alcoholic beverages accounted for over 70% of this increase. Nevertheless, inflation, on an annual average basis, has remained around mid-single-digit levels in both 2009 and 2010,” the statement said.

It pointed out that the recent monetary easing by the Central Bank had helped improve domestic credit conditions and thereby supported the sustained recovery in domestic economic activity.

“The external sector too has recorded encouraging performance in recent months. While domestic economic activity has rebounded strongly this year, it is expected that this growth momentum would continue into the next year too, supported by the recovery in the global economy.”



Growth in broad money has remained within targeted levels, thus far, despite the pick-up in credit granted to the private sector in recent months, due to a decline in both net foreign assets of the banking system as well as credit obtained by the government from the banking system, the statement insisted.

“While it is expected that credit flows to the economy would move in tandem with the level of economic activity, the bank will take appropriate policy measures if it observes any signs of a build up of demand pressures in the economy. Taking into consideration the recent economic developments as well as expected economic developments, the Monetary Board, at its meeting held on 13 December 2010, decided to maintain the policy interest rates of the Central Bank unchanged at their current levels. Accordingly, the Repurchase rate and the Reverse Repurchase rate of the Central Bank would remain at 7.25 per cent and 9.00 per cent, respectively.”