‘Lanka has flexible policy framework’
The IMF said that Sri Lanka had delayed last year in taking steps to
contain its current account deficit, but now had a flexible policy
framework that served it well.
“Imports grew sharply in 2011 and from a macroeconomic perspective,
however useful those imports were, they have to be financeable,” said
Koshy Mathai, IMF’s Resident Representative, in an address to a business
As a petroleum importing country, Sri Lanka must find ways to finance
the increased prices of petroleum, he added.
The Sri Lankan authorities last year focused on mobilizing new forms
of capital inflows to finance the country’s current account deficit,
Mathai said, but took few steps to reduce the financing need itself.
When capital flows were slow to materialize, the Central Bank of Sri
Lanka responded by selling dollars into the market to meet the demand
and stabilize the rupee, causing hard-currency reserves at the Central
Bank to dwindle sharply.
A current account deficit occurs when a country’s total imports of
goods, services, income and transfers was greater than the country’s
total export of goods, services, income and transfers.
In early 2012, a package of policies had been introduced.
Mathai said these measures had been painful, but were necessary and
were now helping to narrow the current account deficit and stabilize
reserves and the broader economy once again.
The package included exchange rate liberalization. The value of the
rupee was adjusted in the November 2011 budget and was virtually
floated, starting in February 2012.
The Sri Lankan rupee had depreciated by around 17 per cent since last
The Central Bank also tightened the monetary policy, by raising
policy rates and imposing a credit ceiling on banks.. Rapid credit
growth in 2011, was seen as fueling the import demand.
The government early this year, also raised the prices of fuel,
electricity and other basic goods substantially and increased tariffs on
motor car imports and all measures aimed at preserving foreign exchange
Mathai said that flexible management of exchange rate, monetary and
fiscal policy would help to buffer the economy from shocks and prevent
the need for any further sharp adjustments. He urged that these flexible
policies be maintained.
The Central Bank has forecast a growth below 7 percent this year,
after revising it down in March from an original 8 per cent. The growth
last year was at a record 8.3 per cent.
P:S: This is corrected story of Koshy Mathai’s speech which was
published on Daily News on December 10.