IMF commends Lanka’s economic performance

On October 17, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Sri Lanka and commended Sri Lanka’s recent economic performance and endorsed Sri Lanka’s macroeconomic policies under the Ten-Year Development Plan, the Central Bank said.

At the same time, they drew attention to some emerging risks arising from the recent financial crisis. The Key points of the Public Information Notice, which sets out the IMF Staff Assessment and the Executive Board Assessment, are summarized below. Sri Lanka has achieved strong growth averaging 61/2 percent since 2002, raising per capita income to about $1,625 (above regional peers) and reducing the poverty rate from 22.7 percent to 15.2 percent over 2002-07. The authorities’ Ten-Year Development Plan (“Mahinda Chintana”) launched in early 2007 aims to sustain this performance by strengthening infrastructure investment.

In 2007, the continued brisk pace of exports resulting from high international tea prices, improved EU access for garments exports, subdued imports, and strong remittances bolstered the current account, with the deficit more than financed by rising capital inflows.

Gross official reserves rose from US$2.5 billion at end-2006 to US$3.1 billion as of end-2007. In 2008, however, soaring oil prices sharply increased the oil import bill, amid softening external demand and worsening external financing conditions. The external current account deficit is projected to widen sharply in 2008.

Sri Lanka’s domestic financial markets have been largely immune to the global financial turbulence. Sri Lankan institutions reportedly have little or no direct exposure to U.S. sub-prime assets, while a significant portion of net foreign inflows reflects investments by non-resident Sri Lankans.

Executive Board Assessment

The Executive Directors have commended Sri Lanka for its impressive record of economic growth over the last few years, with the rate of unemployment and poverty indicators falling.

The authorities’ bold decision to adjust administered fuel prices, transport fares, and electricity prices has also been commended as a decision that will reduce fiscal risks over the medium term. Directors welcomed the significant tightening of monetary policy to address inflationary pressures.

However, the Directors have expressed concern that the combined build-up of macroeconomic imbalances, balance sheet vulnerabilities, high inflation, and external financing pressures poses serious risks to economic stability.

The recent increases in international food and fuel prices and the global financial crisis have heightened the challenge facing the authorities. Amid increased international risk aversion, raising external finance will become increasingly challenging, and Sri Lanka’s external accounts are vulnerable to a reduction in international investor risk appetite.