The Executive Board of the International Monetary Fund (IMF) recently concluded the Article IV consultation with Sri Lanka and commended Sri Lanka’s recent economic performance and endorsed Sri Lanka’s macroeconomic policies under the Ten-Year Development Plan. At the same time, they drew attention to some emerging risks arising from the recent financial crisis.

Sri Lanka has achieved strong growth averaging 6½ percent since 2002, raising per capita income to about $1,625 (above regional peers) and reducing the poverty rate from 22.7 percent to 15.2 percent over 2002-07. The Ten-Year Development Plan, Mahinda Chintana launched in early 2007 aims to sustain this performance by strengthening infrastructure investment.

The Executive Directors have commended Sri Lanka for its impressive record of economic growth over the last few years, with the rate of unemployment and poverty indicators falling. The government's bold decision to adjust administered fuel prices, transport fares, and electricity prices has also been commended as a decision that will reduce fiscal risks over the medium term.

Directors also welcomed the significant tightening of monetary policy to address inflationary pressures.

However, the Directors have expressed concern that the combined build-up of macroeconomic imbalances, balance sheet vulnerabilities, high inflation, and external financing pressures poses serious risks to economic stability.

At the same time, the Directors have welcomed the government's plans for medium-term fiscal consolidation, as envisaged in the Fiscal Responsibility Act, and called for their decisive implementation in order to reduce pressure on the external account, inflation, and the exchange rate. They have also encouraged the authorities to implement promptly, measures aimed at broadening the tax base by significantly rationalizing exemptions and restraining current spending. The resulting fiscal space should be used to preserve infrastructure spending.

The Directors have also commended the authorities for exercising significant restraint with respect to reserve money growth, and encouraged further monetary policy tightening to help anchor inflation expectations.

In addition, the Directors welcomed the authorities' efforts to strengthen the financial system, including the recent measures to address the maturing credit cycle, the progress made in implementing Basel II, the introduction of corporate governance guidelines for banks, and tighter oversight of state banks. They have also indicated that reforms to financial supervision and regulation should continue.