Indicators suggest strong growth across all sectors- IMF

The macroeconomic situation of the country remains satisfactory and the country will achieve its economic growth this year, economy analysts said.

This was endorsed by the IMF as well and the mission led by Brian Aitken who visited Colombo recently. Despite slowed economic growth in the first quarter of the year reflecting flood-related damage, the leading indicators suggest that growth is currently strong across all sectors, the mission said.

According to the Central Bank, performance in industry and services sectors is sound. Although the Maha harvest was affected by floods, the Yala harvest would serve to help continuation of stable paddy prices throughout the year. With the continuous supply of vegetables and other field crops after the floods, domestic food prices have begun to decline, easing pressure on inflation.

Inflation, as measured by the year-on-year change in the Colombo Consumers’ Price Index (CCPI) declined in May 2011 to 8.8 percent from 9.8 percent in the previous month.

The annual average inflation showed a marginal increase of 0.3 percent to 6.9 percent in May, while the monthly change in the Index was 0.6 percent.

Inflation is expected to remain in single digit as food prices have begun to decline. In the international market, prices of cereals and sugar declined marginally from its peak early this year, while prices of most other commodities remain largely unchanged.

Prices of Brent crude oil have been around US dollars 112 per barrel, on average, said the monitory policy review report of the Central Bank.

Exports and imports continued to expand while earnings from tourism, workers’ remittances, and the inflows to the capital and financial account have resulted in the balance of payments recording a surplus in the first quarter of the year.

Provisional estimates show that the gross official reserves (without ACU receipts) have increased to US $ 7,055 million by June 9, from US dollars 6,610 million recorded at end December 2010. During the year, in the domestic foreign exchange market, the rupee has appreciated by 1.34 percent against the US dollar, 0.88 percent against the Indian rupee, and 0.14 percent against the Japanese yen, while depreciating against the Euro by 6.06 percent, and by 3.59 percent against the pound sterling.

The fiscal consolidation process is expected to continue. Total revenue during the first four months increased by 18.4 percent compared to the corresponding period of 2010, while total expenditure and net lending increased only by 11.6 percent during the same period.

The IMF said that the tax reforms initiated in the 2011 budget have been implemented, tax revenue is strong, and fiscal performance to date remains consistent with the government’s 2011 deficit target of 6 percent of GDP.

The government has appropriately shifted investment promotion away from granting tax concessions. However, it said that more steps need to be taken to institutionalise this policy by revising investment guidelines and regulations to provide more clarity to prospective investors while safeguarding tax revenue.

According to the IMF private sector credit growth has been rapid, but from a low base, and there are not yet signs of demand-driven inflationary pressures. The Central Bank should be on the lookout for signs of overheating, and be prepared to adjust monetary policy accordingly. Banks and finance companies should also guard against a relaxation of lending standards and the accompanying risk of non-performing loans.

Strong export growth and continued large remittance inflows have supported reserves, but going forward, rapid import growth and high oil prices could put pressure on the balance of payments.

In this event, the Central Bank should allow the exchange rate to reflect market forces flexibly and avoid sustained sales of foreign exchange, ensuring that reserves remain healthy and the economy competitive, the IMF said.