While announcing the approval of the sixth tranche worth $216.6 million of the standby arrangement, yesterday, the International Monetary Fund (IMF) stated that the basic trends of inflation in the country are not alarming and therefore it does not call for a tightening of the monetary policy.
"The inflation in the country is due to supply shocks; the recent floods have increased the prices of vegetables. However the underlying trends in inflation aren't cause for concern-we don't see this as an over-heating of the economy. If the Central Bank (CB) put the brakes on the economy and tightened monetary policy then that would slow down growth and we don't encourage this," IMF Resident Representative Dr. Koshy Mathai said.
However he cautioned that if the inflation from the supply side spilled over to demand, then a tightening of monetary policy would be required. "In the long run if this inflation results in a call for wage hikes and then businessmen feel the need to increase overall prices then we would think some measures need to be taken," he said
He stated that the external position of Sri Lanka was improving with capital inflows being sufficient and the exchange rate remaining stable. However he called for greater flexibility in the exchange rate.
"We would like to see more flexibility in the exchange rate in order to retain the competitiveness of the economy," he said.
The IMF also predicts a 7 per-cent growth in the economy in contrast to the 8.5 percent growth forecasted by the government. "We have seen that for Sri Lanka there is 5 to 6 per-cent growth on average over the past few years- this is quite miraculous considering the country was going through a war through this time. But now that the war is over we are hoping for increased growth," he said.
Mathai also commended the improvement in State sector enterprises and encouraged the attempt by the government to have the Ceylon Petroleum Cooperation and Ceylon Electricity Board to break-even by the end of the year.
He commented on the slow growth of Foreign Direct investment into the country. "FDI's have been slow so far but it has almost doubled to 725 Million in 2010. However this is quite low in terms of the size of Sri Lanka's economy in comparison to countries such as Vietnam where FDI is about 10 times as much as Sri Lanka. In fact we don't know the exact reason for this slow growth of FDIs but it will be included into the IMF agenda in the coming months" he said.
Koshy added that although the IMF was happy with the policies adopted by the government up top now, they hope all these policies would be implemented in due course.
The sixth tranche brings the total disbursement to $1.5 billion of the $2.6 billion loan promised in mid-2009. The total amount is set to be disbursed by the first quarter of 2012.
On a technical note the IMF waived the end-December net domestic financing and net international reserves targets upon Sri Lanka's request. "The Executive Board also approved the authorities' request for a waiver of applicability of the end-December performance criterion on net domestic financing for which data are not yet available, as well as a waiver of non-observance of the end-December performance criterion on net international reserves," according to a release by the IMF.
source - www.dailymirror.lk
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