IMF Mission gives positive report on Sri Lanka [Tuesday, July 18, 2006 - 3.30 GMT]

After the two weeks of consultations, the Mission met President Mahinda Rajapaksa yesterday (17) and briefed him on the outcome of the consultations.  
  
According to the Mission the economy grew strongly at 6 per cent in 2005 and the growth momentum further improved in the first quarter of 2006, reflecting a broad based improvement in activities.  CPI inflation declined in 2005, aided by declining food prices and a tightening of monetary policy.  
  
Though the economy was hit by slowing apparel exports and high oil prices, strong remittances and tsunami-related inflows, including debt relief, strengthened the balance of payments of the country last year.  The current account deficit too narrowed in that year.  
  
According to the Central Bank monetary policy has been tightened to curb inflation.  Due to this the Central Bank adjusted upwards its policy interest rates by 200 basis points since November 2004 to reduce the excessive demand pressure and remove inflationary pressures.  As a result, key real interest rates have turned positive in the last quarter of 2005.  
  
Total public debt declined by 11 per cent of GDP to 94 per cent of GDP by end 2005 from 105 per cent of GDP at end 2004, mainly on account of high growth and appreciation of the rupee against the US dollar.  
  
The Mission noted that the country’s financial system soundness indicators had  improved markedly.  This reflected both the strengthening and better enforcement of the regulatory and supervisory framework, as well as the ongoing restructuring of the two large publicly owned commercial banks.  The NPL ratios have declined, while provisioning has increased across the banking system.  The Central Bank has taken several measures to enhance the regulatory and supervisory framework, including raising the minimum capital requirement (by 2007) and adopting the Basel II capital accord by 2008.
  
The Mission expects that the government’s ongoing efforts in finding a solution through multi-party negotiations will be successful.  The country has significant untapped growth potential, including in the conflict affected areas in the North and East.  There is also potential to take advantage of rapid growth in major countries in the region, such as India and China.
  
The government’s medium-term policy framework places a strong emphasis on reducing poverty through raising economic growth.  The policy strategy seeks to spur sustainable economic growth to 8 per cent by 2008 through a substantial increase in investment and a greater emphasis on the role of the state to facilitate growth.
  
The Mission supports the Sri Lankan authorities’ emphasis on macroeconomic stability and growth.  
  
The Mission also noted certain significant downside risks to the outlook.  External vulnerabilities include a global growth slowdown, rising international interest rates and risk aversion, increased competition for export market share, and obstacles that may affect the investment climate. The Mission also emphasised the need for continuing with the government’s efforts at keeping the budget deficit under control and raising public investment to ensure sustainable future growth.
  
Mr. Ajith Nivard Cabraal, Governor of Central Bank of Sri Lanka, Dr P.B. Jayasundera, Secretary to the Treasury, Mr W.A. Wijewardena, Deputy Governor of the Central Bank of Sri Lanka, Mr R.A. Jayatissa Deputy Secretary to the Treasury and Dr H.N.Thenuwara, Director of Economic Research of Central Bank of Sri Lanka also participated in the meeting.

 

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Last Updated Date: July 18, 2006 -3.30 GMT