Economy expanding rapidly - IMF
Sri Lanka’s macroeconomic conditions remain satisfactory. The economy
is expanding rapidly, with growth likely to come in around 7.5 percent
this year. As expected, headline inflation has moderated, reflecting
declines in food and commodity prices, and there are as yet no clear
signs of economic overheating, states on International Monetary Fund
(IMF) staff mission statement.
A staff mission led by Dr. Brian Aitken visited Colombo from August
29 - September 7 to conduct discussions for the Seventh Review of the
Standby Arrangement. The team met with government and Central Bank
officials, as well as representatives of civil society and the private
sector. The team issued the following statement today at the conclusion
of its visit:
The overall monetary policy stance thus appears appropriate.
Nonetheless, sustained rapid credit growth bears close monitoring and
may need to be slowed in order to prevent future inflationary pressure.
Banks and other financial institutions should also guard against a
relaxation of lending standards and the accompanying risk of a build-up
of nonperforming loans.
Fiscal performance has been satisfactory and the government’s 2011
deficit target is still within reach. The government is now preparing
its 2012 budget and remains committed to continue with recent trends
toward fiscal consolidation.
The State energy enterprises’ recent performance, however, remains a
concern. Given the lack of rains and high international oil prices,
current policies would result in financial losses at the CEB and CPC
this year.
The uncertain global environment underscores the importance of
continuing to build foreign exchange reserves. While headline reserves
are at a comfortable level, buoyed by the Central Bank’s purchase of the
proceeds from the recent 10-year Eurobond, nonborrowed reserves - that
is, excluding Eurobonds, IMF disbursements and foreign holdings of
Treasuries - have steadily declined, reflecting foreign exchange sales
by the Central Bank. This policy does not seem to be in line with the
current fundamentals of the economy. In responding to market pressures,
the Central Bank should henceforth limit its intervention and allow more
exchange rate flexibility.
Flexibility in the exchange rate, which has appreciated substantially
in real terms over the past two years, is also an essential component in
ensuring Sri Lanka’s export competitiveness.”
The team will return to Washington and continue to assess policy
actions and economic developments and looks forward to continuing
discussions at the Annual Meetings in Washington.
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