Economic developments stronger than expected:

First review of IMF Stand-By Arrangement

Sanjeevi Jayasuriya

The Head of IMF Mission Dr. Brian Aitken addresses the media at the Central Bank conference room. Dr. Koshy Mathai and Dr. (Mrs) Eteri Kvintradze look on. Picture by Sumanachandra Ariyawansa

Highlights

* Economic growth projected to be 3.5 percent in 2009

* Net international reserves continue to show impressive growth

* High remittances, a boost to the economy

The economic performance has improved since July. There is a steady inflow to the bond market and foreign investments to the country. Sri Lanka’s economy is showing signs of bottoming off. We are positive about the outlook and performance, said Head of IMF Mission Dr. Brian Aitken.

The Government and the IMF have agreed on milestones and achieving targets. Recent economic developments have been stronger than expected. Economic growth is now projected at 3.5 percent in 2009 relative to 3 percent at the time of program approval. Inflation remains subdued and is expected to remain in the single digit in 2009. Exports have shown signs of recovery in recent months and import growth, which has thus far remained sluggish, is expected to pick up in the second half of 2009 as economic activity increases, he said.

An IMF Mission visited Colombo to hold discussions with the authorities on the first review of the program supported by the Stand-By Agreement. The program was approved by the IMF executive board on July 24 and entails seven quarterly reviews over the next 18 months. Each review will assess macroeconomic developments, determine progress towards meeting the agreed program benchmarks and review prospects for achieving the program’s goals.

The Government’s policy approach has been in line with the program and performance based on the program’s July targets has been broadly satisfactory. Net international reserves continue to show impressive growth driven by an increase in investor confidence and stronger than expected remittances. The Central Bank’s action to rebuild reserves while reducing policy interest rates is welcome. The recent recovery in budget revenue has improved the fiscal outlook, he said.

There was an increase in the net international reserves due to high remittances following the end of the war and this is a big boost to the economy. The Government is moving in the right direction in meeting the IMF laid down physical targets. However, it is too early to comment about the Budget.

The 2010 Budget deficit should be 6 percent. The IMF Stand-By arrangement has been provided to rebuild the Central Bank reserves. It could not be used for reconstruction of the North and the East. We need to evaluate how we could accommodate this, he said.

The Government remains committed to the policy measures laid out in the technical Memorandum of Understanding on economic and financial policies to achieve the targets set by the IMF.

It includes a further increase in net reserves and additional steps to strengthen the financial sector. The program’s target of reducing the budget deficit to 7 percent of the GDP in 2009 is ambitious, but the Government is committed to taking steps to achieve this by improving tax administration to support further increases in revenue and controlling expenditure. There have been no hidden conditions, he said.

The Government is in line to achieve the target of 2 percent revenue increase. There is no need to increase taxes, but to broaden the base and to simplify the tax collection. It is important to increase the level of efficiency in tax collection. Our expertise is not in the structural changes, but in monitoring progress and efficiency. We focus on budget deficit, quality and feasibility adjustment, he said.

The IMF staff will monitor the developments over the next several weeks including performance against the end-September targets to determine whether adequate progress had been made to recommend at the completion of the first review for consideration by the IMF’s Executive Board. If the Board approves the completion of the review, the next disbursement under the program would be released by the middle of next month.

The IMF is planning to set up an office in Colombo within the next two weeks.