'Lanka's economic performance solid'

by Lalin Fernandopulle

The International Monetary Fund (IMF) said that Sri Lanka can achieve a 6.5 percent Gross Domestic Product (GDP) growth rate this year backed by strong economic fundamentals.

IMF, Deputy Managing Director Naoyuki Shinohara who was on a short visit to Sri Lanka last week said that the IMF is confident Sri Lanka can achieve this growth rate as envisaged by the IMF early this year.

"There has to be a strong commitment by the government to reduce the budget deficit which we hope policy makers will address in the 2014 Budget," he said.

"Reducing the budget deficit is vital to accelerate growth and reduce borrowing," Shinohara said.

The IMF has urged the government to boost tax revenue to tackle a relatively high budget deficit and public debt level.

The IMF forecast an economic growth rate of 6.5 percent for the current year, a full percentage point lower than the Central Bank's recent forecast of 7.5 percent.

Low exports due to weak overseas markets, slow credit disbursement to the private sector and flat government revenues will slow the pace of growth, an IMF official said.

The IMF is also pleased with the post-program economic performance of Sri Lanka on sustaining growth with low inflation and flexible exchange rate.

Growth rate is sound, inflation is good, current account is stable and the exchange rate is flexible, Shinohara said.

"In my meetings, I commended the authorities for delivering strong growth, low inflation, fiscal consolidation, and a strengthening of the external accounts since the end of terrorism in 2009, and on the ambitious growth and development objectives laid out in the Mahinda Chinthana. Sri Lanka has also kept up its solid economic performance in the face of recent adverse external conditions," he said.

"Our discussions focused on how to accelerate and sustain growth, ensure macroeconomic and financial stability, and take advantage of regional and global integration. Fiscal consolidation has been steady, and the authorities are committed to further reduce the budget deficit and public debt, which remain relatively high," Shinohara said.

"In this context, I support the authorities' efforts to boost revenue by broadening the tax base and strengthening tax administration - creating opportunities to further reduce the deficit while raising public investment. Private investment, including FDI, could be supported through improvements in the business environment," he said.

Shinohara also stressed the importance of pursuing a cautious monetary policy, keeping in mind past challenges with inflation, the risks posed by Fed tapering and the need to assess the impact of monetary easing already undertaken. "I think that Sri Lanka would continue its flexible exchange rate regime -allowing it to serve as a key buffer against external shocks," he said.The International Monetary Fund completed the US$ 2.6 billion Stand-By Agreement last year boosting Sri Lanka's foreign reserves. The IMF said it has not discussed a new program with Sri Lanka.

"We are ready to discuss the issue if there is a request for a program by the government," Shinohara said.

He said that in the short-term Sri Lanka faces external risks following the tapering by the US Federal Reserve. Sri Lanka is better at weathering it that many other countries with large deficits. Sri Lanka has access to international markets though the scale is limited. In the medium-term, the global economy will slowdown further.

It will have an adverse impact on Sri Lanka's exports.

With regard to the state-owned entities such as the Ceylon Petroleum Corporation, Ceylon Electricity Board, he said that the IMF is happy about the recent increase in electricity tariffs to boost revenue to the institution.

He said that the IMF was concerned about the numbers and not how it was managed.

He said that the IMF has not changed its forecast for Sri Lanka next year and added that it is concerned about the government addressing the budget deficit.

"The IMF will continue to work closely with the authorities to provide high-quality policy advice to enhance stability and growth and I look forward to continuing our cooperation," Shinohara said.