IMF’s take on Sri Lanka’s good, bad and the ugly

• Pleased with overall macro economy and fiscal performance, predicts 7.5% growth for 2011
• Calls for monitoring of rapid credit growth
• Wants CPC and CEB losses controlled
• Concerned over lacklustre FDI, export competitiveness  Reiterates call for flexible exchange rate 

By Uditha Jayasinghe
The International Monetary Fund (IMF) in its latest review gave mixed evaluations with positive focus being given to the overall economy but negative analysis on State Owned Enterprise (SOE) losses and foreign direct investment along with making the exchange rate more flexible.

IMF Review Mission Chief Dr. Brian Aitken told media that the macroeconomic conditions and fiscal performance remain satisfactory. “The economy is expanding rapidly with growth likely to come in around 7.5% 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.”
However he called for monitoring of sustained rapid credit growth and expressed concern over the Ceylon Petroleum Corporation (CPC) and Ceylon Electricity Board (CEB) making substantial losses this year as well.
“The State energy enterprises’ recent performance 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,” he said.
In response to questions Dr. Aitken pointed out the relatively low flow of Foreign Direct Investment (FDI) a concern for Sri Lanka. He added that the country should also concentrate on maintaining its export competitiveness to become economically stronger.
“If I were to highlight two main concerns for Sri Lanka it would be FDI that is currently below expectations and the possibility to reduced export competitiveness,” he remarked adding that Sri Lanka needs a larger level of both local and foreign investment to reach its targeted growth.

He reiterated the IMF’s standpoint urging for a more flexible exchange rate but admitted that it must be done with careful consideration to the external environment.
“While headline reserves are at a comfortable level, buoyed by the Central Bank’s purchase of the proceeds from the recent 10-year Eurobond, non-borrowed reserves —  i.e. excluding Eurobonds, IMF disbursements and foreign holdings of Treasuries — have steadily declined, reflecting foreign exchange sales by the Central Bank.”
He stressed that this policy does not seem to be in line with the current fundamentals of the economy. Dr. Aitken opined that in responding to market pressures the Central Bank should henceforth limit its intervention and allow more exchange rate flexibility. This is also an essential component in ensuring export competitiveness.              
Regarding the upcoming Budget the IMF does not expect to see more tax reforms but rather recommended maintaining predictability to build stability on government policies. Kudos was also given to the Central Bank for considering tools other than interest rates to control inflation.  
The latest review will see another US$ 400 million being released as part of the US$2.6 billion Stand-by Agreement after officials meet in Washington later this month at the annual World Bank meetings.