Financial system remains relatively strong - IMF

by Sanjeevi Jayasuriya

Sri Lanka should keep policy rates on hold and make structural reforms to boost economic growth, said IMF Mission Chief to Sri Lanka, Todd Schneider at a media briefing in Colombo, following a staff mission led by him conducted post-program monitoring discussions from September 17-25.

“We are satisfied with the post-program of the IMF Stand-By Agreement that ended recently where Sri Lanka has done reasonably well,” he said. The declining inflation is broadly consistent with the rest of the economic picture.

However, there is room for stability with regard to the reserve position, Schneider said.

“We looked at the broader picture. The Central Bank is working on foreign exchange flexibility. The borrowings by the government are sustainable.

However, the government should ensure that the necessary capital is maintained,” he said.The macro economic policies are sound and the economy is more resilient to external shocks.

The government entering into free trade agreements with selected countries is one possible option to further economic growth, he said.

“GDP growth accelerated to 6.8 percent in the second quarter of 2013. However, given moderate credit growth, flat budget revenues and relatively low growth in non-oil imports, it is not yet clear whether the acceleration in economic growth will continue into the second half of the year,” Schneider said.

The mission forecasts a growth of 6.5 percent in 2013. The current account deficit narrowed in the first half of 2013 and the balance of payments surplus will widen this year. The NPLs have risen somewhat, but the financial system remains relatively strong, Schneider said in a statement.

Given the possible tapering off of exceptional monetary stimulus by the US Federal Reverse in the months ahead, emerging and frontier markets are likely to face a slowdown or even reversal of capital inflows.

While the rupee has been relatively resilient so far, the balance of external risks for Sri Lanka has shifted to the downside, the statement said. In the complex global environment, it will be essential to adhere to the flexible exchange rate regime that has been a core component of the policy framework since 2012. Intervention should be limited to dealing with excessive short-term volatility.

Contingency plans including a mix of fiscal and monetary policies to counter potential market pressures, should be prepared in anticipation of possible shifts in market conditions. New external borrowings should also be done with a close eye on sustainability and ensure that investments generate the resources needed to service these obligations.

The mission recommends that policy rates remain on hold which will also give time to assess the impact of the recent easing. On the fiscal side, weak revenue remains a serious challenge and the priority should be to reverse the downward trend by reducing exemptions, broadening the tax base and strengthening tax administration and compliance.

Efforts to boost growth should focus on structural measures such as tariff reform, enhanced revenue mobilisation to support capital expenditure and improvements in the general business climate.