IMF bullish on Sri Lanka

International Monetary Fund (IMF) Sri Lanka Resident Representative Dr. Koshy Mathai reiterated the fund’s stance on the recent policy reversals of the Central Bank regarding the exchange rate and interest rates and the government’s decision to increase domestic fuel prices, saying the policy moves were encouraging and could help the economy.
 Addressing a special forum convened by HSBC Sri Lanka yesterday morning, Dr. Mathai said that Sri Lanka’s economy was in strong position compared with many other economies in the world. "Right now there is not much to worry about and I have a lot of optimism. We remain bullish on Sri Lanka’s economic growth prospects. Inflation is low, the debt to GDP ratio is declining, and the government is committed to brining down the fiscal deficit."

The debt to GDP ratio which was over 108 percent several years ago had declined to 78 percent last year. The deficit which was at 9.9 percent of GDP in 2009 is expected to be brought down to 6.8 percent in 2011.

"The economy is at very credible position but it does not stand out compared to most other economies which have done much more, but nevertheless, the debt stock favours Sri Lanka, where the growth rate outstrips interest rates, so debt to GDP would eventually drop," Dr. Mathai said.

Dr. Mathai said the economy did face a problem on the external sector front which became manifest six to nine months ago. The Central Bank had sold nearly US$ 3 billion since July 2011 to keep the exchange rate stable in the face of severe import demand and also printed more than Rs. 300 billion to keep rupee interest rates stable. The IMF had not been too happy with these policy decisions and had delayed payment of a US$ 400 million tranche under the US$ 2.6 billion standby facility arrangement. However, early February 2012, the Central Bank made a U-turn, floating the exchange rate and curbing credit growth, which was extremely high and fuelling import demand, by increasing interest rates and slapping a ceiling on commercial bank credit growth.

"We are extremely happy these policy decisions were taken. It is a step in the right direction. But most importantly, we are encouraged by the fact that the Central Bank and the government implemented a comprehensive mix of policies with a commitment to remain flexible. And this is important because no single policy will bare the full burden of the necessary adjustments that would have to be made, and also if the external account does improve then the rupee would be allowed to appreciate, if it does not, then the rupee would be depreciated a little bit more and perhaps interest rates would also be further tightened," Dr. Mathai said, adding that no one could predict if and when things would improve.

But he did say that authorities shored up the foundation for strong, more sustainable, growth.

source - www.island.lk