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IMF happy with Lanka's growth

2013 Dec 04

The Executive Board of the International Monetary Fund (IMF) says it is encouraged by Sri Lanka’s strong growth and moderating inflation, and by the economy’s resilience in the face of recent market turbulence. They noted, however, that vulnerabilities remain, stemming from high debt and declining government revenues relative to GDP.

IMF Directors commended the authorities’ commitment to fiscal consolidation. They welcomed ongoing expenditure restraint, but cautioned against further cuts in capital expenditure to meet fiscal targets. Instead they underlined the importance of putting tax revenues on an upward trajectory. They emphasized, in particular, the need for further improvements in both tax policy and administration, including elimination or rationalization of exemptions and holidays, an IMF statement said.

Directors noted that the flexible exchange rate regime has acted as a buffer to external shocks, and welcomed the central bank’s move to a less active intervention strategy. In view of the risks of further market turbulence ahead, they emphasized the need to allow time for the effects of monetary policy to feed through to private credit and money growth before considering a further easing.

Directors noted progress in financial sector development, and efforts to strengthen supervision and regulation. However, they saw remaining vulnerabilities, including the recent rise in nonperforming loans, and risks from the increase in external borrowing by banks and private entities on commercial terms. Given Sri Lanka’s high level of debt and potential vulnerability to external shocks, they emphasized that close monitoring is warranted.

Directors welcomed the opportunity to review Sri Lanka’s experience with the 2009 exceptional access Stand-By Arrangement, and agreed with the thrust of its conclusions.

They concurred that the key program objectives of supporting macroeconomic stabilization and averting a balance of payments crisis were achieved. They noted, however, that the wider objectives of the program were only partially achieved as fiscal and external vulnerabilities persist, while durable progress needs to be made in reducing the losses of state-owned enterprises. Directors also highlighted the importance of aligning program design with a careful consideration of structural and implementation capacity. (Colombo Gazette)

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