Lankan economy strong - IMF

Sanjeevi Jayasuriya

The IMF staff mission to Sri Lanka said that the country's economy will grow rapidly despite the slow global growth. While commending the policy decisions taken by the government to address economic fundamentals in going forward, the IMF is moving towards completion of the next review of the Standby Agreement.

"Sri Lanka has been growing rapidly and our broader view is that it will continue the strong growth. We feel the economy is growing very strong and inflation is under control. However, the widening of trade deficit and more rapid credit growth are two key areas of concern," IMF Staff Mission Head Dr. Brian Aitken said.

"We had productive rounds of discussions with the government and arrived at a common understanding as to measures needed. The trade deficit is due to post war consumer environment and it is a challenge to the economic success. The country needs to make a qualitative shift in policy direction," he added.

The monetary policy should bring about sustainable current account deficit.

The deficit reduction efforts will tighten credit growth while more flexible exchange rate is important. The policy stance to devalue exchange rate by three percent is a step in the right direction, he said.

"We like to see monetary, fiscal and exchange rate policies supporting the country going forward with right economic fundamentals. We stand ready to support the government and looking for policy actions on sustainable basis to limit the credit growth."

"The current account deficit is due to strong export growth and pick up in the imports which is associated with the robust economic growth. The re-balance of economy needs policy direction," he commented.

The economy continued to expand rapidly in 2011, with growth likely to come in around 8 percent and inflation continued to moderate to solid mid-single digit levels.

The government budget deficit also declined further to under 7 percent of GDP.

However, a strong rebound in domestic demand supported in part by increased banking lending, resulted in a larger than anticipated surge in imports causing the current account deficit to widen significantly in 2011, despite healthy growth in exports and remittances. External reserves declined markedly in the second half of 2011.

The discussions focused largely on the government's strategy to address the external imbalances that emerged in the second half of 2011 and ensure that the economy's recovery continued without undue disruption.

There was broad agreement that a decisive policy response was needed to put the economy on a sounder macroeconomic footing, especially given the current uncertain global environment.

In this context, we are encouraged by the recent adjustments in the monetary and exchange rate policy stance, as well as the strong commitment of the government to further reduce the budget deficit to 6.2 percent of GDP in 2012 and address the losses of key state owned enterprises, Dr. Aitken said. The IMF completed six reviews under the Standby Agreement to provide US $ 2.6 billion facility and the review is for the remaining $ 800 million.

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