Progress under SBA stable:

IMF to conduct semi annual reviews

by Lalin FERNANDOPULLE

The International Monetary Fund (IMF) has decided to conduct semi annual reviews on Sri Lanka considering the progress of the economy and its track record, said IMF Resident Representative, Dr. Koshy Mathai at the completion of the sixth review of the Stand-By Arrangement (SBA) on Tuesday.

Dr. Koshy Mathai

He said the IMF team visited the country once in three months for quarterly reviews but now has decided to conduct semi annual reviews taking into account the progress of the economy under the SBA.

“The Sri Lankan economy continues to make progress under the SBA and the overall macroeconomic developments remain favourable. Growth is strong, inflation remains in single digit and reserves are at a comfortable level”, Dr. Mathai said.

IMF approved US$ 218.3 million bringing the total disbursement to SDR 1.10 billion (about US$ 1.75 billion) under the arrangement. Sri Lanka’s foreign reserves have surpassed US$ 6 billion.

IMF approved the SBA in July 2009 for US$ 2.6 billion to support Sri Lanka’s foreign reserves which had shrunk rock bottom before the arrangement.

The IMF is pleased with the meeting of the 2010 budget targets and added that the budget developments so far in 2011 are in line with expectations.

The review further stated that steps taken to handle flood-related expenses by reallocating and reprioritising expenditure within the existing budget will help maintain deficit targets for 2011.

Floods in the North Eastern parts of the country in the early part of the year put inflationary pressure on domestic food prices.

Torrential rains swept vast stretches of paddy land in the East and the exact loss has not been assessed yet.

Dr. Mathai said that the recent increase in domestic fuel prices is painful and added that there needs to be a scheme to ease the burden on the poor.

“The rise in domestic fuel prices will have an impact on inflation which will come down in the rest of the year”, he said.

According to the Central Bank, inflation dropped to 6.8 percent in January on a year-on-year basis from 6.9 percent in December last year.

The annual average inflation increased to six percent in January this year from 5.9 percent in the previous month.

Fuel prices were increased last week in keeping with the rise in global oil prices that is expected to further surge due to the tension in the Middle East and the crisis in Japan.

The IMF noted that reforming the two State energy enterprises and bringing their combined operating balance to zero this year will ensure durability of fiscal adjustments. For this end, it is vital to allow adjustment of domestic prices to reflect fluctuations in global oil prices.

The IMF noted that steps to expand liquidity management tools at the Central Bank’s disposal will help maintain its control over monetary conditions. Allowing sufficient two-way flexibility of the exchange rate will help support the external position and meet the reserves target.