Lanka makes good progress under SBA - IMF

By Lalin FERNANDOPULLE

Sri Lanka’s Foreign Direct Investment (FDI) this year will double last year’s figure of US$ 375 million but it is still low compared to Vietnam which is much higher, said IMF Resident Representative Sri Lanka, Dr. Koshy Mathai.

Dr. Koshy Mathai

He said the FDI this year will be around US$ 725 million which is a substantial growth compared to last year and added that there is immense room for growth.

He was addressing the media on the completion of IMF’s fifth review of Sri Lanka’s economic performance under a program supported by the Stand-By Arrangement approved in mid 2009.

Dr. Mathai said steps taken to repurpose the BOI into an investor facilitator agency will be crucial to attract investors and enhance FDIs for the country.

“Macroeconomic stability is critical to attract investors to the country and improvements made to doing business in Sri Lanka is sound which will help create the environment to attract investors”, he said.

The IMF on completion of the fifth review approved the disbursement of US$216.6 million bringing the total disbursements under the arrangement to US$ 1.516 billion.

The IMF will disburse US$ 217 million within the next couple of days.The remaining US$ 1.1 billion of the total US$ 2.6 billion loan facility will be disbursed over the year and at the beginning of 2012.

“The IMF is happy with the economic progress with an increase in reserves, stability in exchange rate and surplus in balance of payments.The IMF would like to see a two-way flexibility of exchange rate”, Dr. Mathai said.

“Growth is strengthening and inflation remains in check. Inflation ticked up due to the rise in international as well as local food prices affected by floods” , the IMF mission head said.

The IMF has noted that imports have recovered and with strong remittance inflows gross reserves in the country remain at comfortable levels.

“Improvements in fiscal performance are encouraging.The 2010 Budget execution addressed past fiscal slippages and bolstered the credibility of fiscal policy. The 2011 Budget is generally sound and reflects the government’s strong commitment to the program’s goals”, the IMF said.

The IMF is optimistic that Sri Lank will achieve an economic growth rate of around 8 percent this year as projected by the Central Bank.

The Executive Board of the IMF also approved the authorities’ request for a waiver of applicability of the end-December performance criterion on net domestic financing for which data are not yet available, as well as a waiver of non-observance of the end-December performance criterion on net international reserves.

Following the Executive Board’s discussion on Sri Lanka, Deputy Managing Director and Acting Chair Naoyuki Shinohara, said that Sri Lankan authorities have made good progress under the Fund-supported program and macroeconomic developments continue to be favourable.

“The proposed tax reforms and reforms of the Board of Investment’s tax concession regime should result in a more efficient, transparent, and simpler tax system with a broader base. If implemented properly, these reforms should improve tax compliance and deliver durably higher revenue.

Monetary conditions are stable, and credit has picked up. With few signs of demand-driven inflation pressures, the policy stance remains appropriate, but the Central Bank should be ready to act to head off any emerging inflation risks.The Central Bank has been building reserves while allowing the exchange rate to appreciate. Looking ahead, however, the exchange rate will need to be sufficiently flexible in both directions to safeguard external stability.

Financial sector reform has continued in line with the program. Going forward, reforms should focus on further strengthening the financial system and expanding funding options for the private sector, including through a deeper corporate bond market and a revamped legal framework for pension funds”, Shinohara said.