International Monetary Fund expresses optimism:

Lanka poised for accelerated economic growth

by Lalin Fernandopulle

Sri Lanka is poised for accelerated economic growth in the post-conflict era through enhanced investments, fiscal discipline and expansion of human capital, says the International Monetary Fund (IMF). The IMF expressed optimism about economic prosperity in Sri Lanka following measures taken to cut the budget deficit and introduce fiscal policy reforms to fast-track development.

IMF Resident Representative Dr. Koshy Mathai said that Sri Lanka's economy has grown at five percent throughout the 30-year conflict and now with the battle against terrorism over the country could grow faster provided the correct policies are put in place.

He said the conflict is over and now it is up to the country to lay the basis for accelerated economic growth for which investment in fiscal and human capital is essential.

“Enhancing investments for sound infrastructure, tax reforms and improvement to the business climate will help achieve higher economic growth in Sri Lanka,” Dr. Mathai said. He stressed the importance of carrying through the measures to meet the five percent deficit that the Government targets for 2012. “The IMF has also focused on tax reforms in Sri Lanka which is crucial to widen the tax base, create an efficient tax administration and deliver more revenue to the country,” Dr.Mathai said.

“Sri Lanka’s tax system is too complicated and it needs to be simplified to create a people-friendly tax culture,” Dr. Mathai said. He welcomed the government’s intention to improve the investment regime including the BOI to create a better investment and business environment.

Dr. Mathai said the government’s budget deficit reduction was on track with priority given to fiscal reforms.

Fiscal discipline is vital to achieve macroeconomic stability, deliver economic growth and improve living standards of the people, Dr. Mathai said.

“The Central Bank has done a good job in implementing a sensible monetary policy with interest rates in the right position.

The fiscal policy in Sri Lanka was too loose in the past and the IMF called upon the government to implement reforms,” Dr. Mathai said.

According to an update released recently by CT Smith Stockbrokers Sri Lanka’s economic growth soared to 8.5 percent YoY in 2Q 2010, the highest level in the past decade and above the company’s forecast, resulting in the first half 2010 economic growth rate of 7.8 percent YoY.

Dr. Mathai said that the five percent target originally supposed to be recorded in 2011 will be delayed by a year but, however, even with the delay the fiscal adjustment would be sufficient to bring the debt down on conservative assumption about growth and interest rates. The IMF program focuses on accumulation of foreign reserves at the Central Bank, monetary and fiscal policy. The IMF will look at how the 2011 Budget will help bring down the deficit further and implement tax reforms.

The IMF released the fifth tranche of US$ 200 million in September this year bringing the total amount disbursed so far to US$ 1.2 billion. A balance of US$ 1.4 billion is left to be disbursed under the program that is expected to end early 2012.

Public Information Notice (PIN) of its Executive Board’s 2010 Annual Article 1V Consultation with Sri Lanka stated that the economic recovery that began in the second half of 2009 has been gaining momentum and output is expected to grow by seven percent this year driven by strong growth in the agricultural and services sectors. Meanwhile, the government has accelerated economic growth by approving livelihood and infrastructure development projects worth over US$ 665 million.