'Higher wages may push inflation'
By Sanjeevi Jayasuriya
An IMF staff mission led by Todd Schneider commended the measures
taken by the Government to create a conducive environment for economic
growth, good governance and transparency.
"We welcome the Government’s commitment to good governance, increased
transparency and financial discipline," they said. The mission and the
authorities agreed that medium term fiscal consolidation should remain a
linchpin in macroeconomic policy, ensuring a durable reduction in Sri
Lanka’s public debt, Schneider said.
“Real GDP growth is estimated at 7.4 percent for 2014 and will
continue in the relatively robust range of 6-7 percent in 2015.
Inflation will remain in the low single digit range, although some
upward pressure may emerge as higher wages and salaries translate into
increased demand," he said.
The external current account improved in 2014 and will strengthen
further in 2015 given lower oil prices and further growth in exports,
service trade and inward remittances. The mission agreed with the
authorities that prospects remain favourable and that sustaining robust
growth over the medium term will need continued commitment to policies
in support of macroeconomic stability and structural reforms to enhance
productivity and competitiveness, Schneider said.
The IMF staff mission was in the country from February 23 to March 4
to conduct post-program monitoring discussions. The mission met
Government and Central Bank officials and civil society and private
sector representatives. This form of enhanced surveillance is a routine
practice in countries which have had ‘exceptional access’ to IMF
resources as is the case for Sri Lanka, which successfully completed a
US $ 2.6 billion IMF program in 2012.
The outstanding balance stands at 1.2 billion and the repayment is
expected to run up to 2018.
The mission also highlighted a number of concerns with respect to the
interim Budget. In the mission’s assessment, achieving a deficit of 4.4
percent of GDP will be a challenge and the authorities should consider
contingency measures should revenue fail to materialise as projected.
The one-off tax measures introduced to finance the interim Budget do
not, in the mission’s view, constitute a step towards a more effective
tax system.
The mission and the authorities agreed on the need for more
comprehensive reforms to streamline the tax system and reduce or
eliminate exceptions to put revenue on a steady upward path.
Future technical assistance from the IMF will focus on these areas. A
succession of steps to ease monetary policy over 2013-14 helped
facilitate a recovery of private sector credit late in 2014 and early
this year.
The current stance of monetary policy appears appropriate, but the
Central Bank should monitor credit, inflation and liquidity development
closely in the coming months.
The mission said there has been a decline in Central Bank foreign
exchange reserves over the past six months.
"We highlighted the need to preserve Sri Lanka’s cushion of foreign
exchange reserves and in this context emphasised the need for exchange
rate flexibility. Intervention should be limited to dealing with
excessive short-term volatility. The exchange rate does not appear out
of line with fundamentals, particularly given the projected improvement
in the balance of payments," he said.
A discussion on post-program monitoring by the IMF’s Executive Board
is expected in April. |