IMF mission meets President

A mission from the IMF visited Sri Lanka to conduct consultations with Sri Lankan authorities in terms of Article IV of the Articles of Agreements of the IMF from July 13-17. The mission led by Ms. Olin Liu, Deputy Division Chief, Asia Pacific Department of the IMF highlighted the following at a meeting with President Mahinda Rajapaksa.

* The economy grew at 6 percent in 2005 and the growth momentum further improved in the first quarter of 2006, reflecting a broadbased improvement in activities. CPI inflation declined in 2005, aided by declining food prices and a tightening of monetary policy.

* Though the economy was hit by slowing apparel exports and high oil prices, strong remittances and tsunami - related inflows, including debt relief strengthened the balance of payments of the country in 2005. The current account deficit too narrowed in that year.

* Monetary policy has been tightened to curb inflation. Accordingly, the Central Bank has adjusted upwards its policy interest rates by 200 basis points since November 2004 to reduce the excessive demand pressure and remove inflationary pressures. As a result, key real interest rates have turned positive in the last quarter of 2005.

* Total public debt declined by 11 per cent of GDP to 94 per cent of GDP by end 2005 from 105 per cent GDP at end 2004, mainly on account of high growth and appreciation of the rupee against the US dollar.

* The financial system soundness indicators have improved markedly. This reflects the strengthening and better enforcement of the regulatory and supervisory framework as well as the ongoing restructuring of the two large publicly owned commercial banks. The CPI ratios have declined, while provisioning has increased across the banking system. The Central Bank has taken several measures to enhance the regulatory and supervisory framework, including raising the minimum capital requirement (by 2007) and adopting the Base II capital accord (by 2008).

* The mission expects that the government's ongoing efforts in finding a solution through multi-party negotiations will be successful. The country has significant untapped growth potential, including the conflict affected areas in the North and East. There is also potential to take advantage of rapid growth in major countries in the region, such as India and China.

* The government's medium-term policy framework places a strong emphasis on reducing poverty through raising economic growth. The policy strategy seeks to spur sustainable economic growth to 8 per cent by 2008 through a substantial increase in investment and a greater emphasis on the role of the state to facilitate growth.

* The mission supports the authorities emphasis on macroeconomic stability and growth.

* The mission is also of the view that there are significant downside risks to the outlook. External vulnerabilities include a global growth slowdown, rising international interest rates and risk aversion, increased competition for export market share, and obstacles that may affect the investment climate.

The mission has also emphasised the need to continue with the government's efforts at keeping the budget deficit under control and raising public investment to ensure sustainable future growth.