‘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 gathering here.

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 year.

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 reserves.

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.