Lanka’s economic conditions improving as expected, says IMF

The International Monetary Fund (IMF) office in Colombo issued the following statement today at the conclusion of a 10-day visit by a staff team from IMF headquarters, states a media release from the Central Bank of Sri Lanka.

“An IMF mission led by Dr. Brian Aitken visited Colombo during February 16-25 to hold discussions on performance and policies under the $2.6 billion Stand-By Arrangement, approved by the Board on July 24, 2009. The mission met with officials from the Central Bank, the Ministry of Finance & Planning, the Presidential Tax Commission, and other government ministries and departments, as well as representatives of civil society and the private sector.

“Overall economic conditions are improving as expected, and the economy is poised for a recovery this year. External balances are strong, remittance inflows continue at a high rate, tourism prospects are rapidly improving, and gross reserves remain at comfortable levels.

“For end-December, the government has met the targets agreed under the program for net international reserves and reserve money. Final data for the overall budget balance are not yet available, but the ceiling on domestic budget borrowing — consistent with the government’s overall deficit target of 7 percent of GDP — was exceeded by a substantial amount. This mainly reflects faster-than-expected infrastructure project implementation, higher interest payments, and sluggish fourth-quarter revenue growth. We are currently assessing the implications of this outturn for bringing the underlying budget deficit to a sustainable level.

“Despite this higher borrowing, as well as a recent uptick in year-on-year headline inflation, we continue to assess the central bank’s monetary policy stance as appropriate. With bank lending only slowly beginning to rebound, and economic growth remaining below its potential, we see little sign of emerging demand-driven inflationary pressures. The central bank has acted appropriately through its monetary operations by not allowing higher budget spending to be financed through the creation of additional liquidity. The upward trend in inflation in recent months — reflecting the temporary effects of increases in food and other international commodity prices from low levels in 2009 — is in line with our expectations and should peak somewhere mid-year before reversing itself in the second half of 2010. This phenomenon is not unique to Sri Lankaand is currently taking place in many other counties as well. Overall, we expect average inflation for the year as a whole to stabilize in the high single digits.

“We remain engaged in a constructive dialogue with the government, with the aim of agreeing on policies to support staff’s recommendation to IMF Management and the IMF’s Executive Board for the completion of the current review of the Stand-By Arrangement.