In an statement issued Tuesday following the conclusion of the Article IV consultation with Sri Lanka by the Executive Board of IMF last month, the executive directors commended the authorities for their satisfactory program performance, which has helped stabilize the economy and improve Sri Lanka's near-term growth prospects.

The Board added that continued fiscal adjustment, a more efficient capital market, and an improved business environment are needed to build a strong foundation for private sector-led growth.

The Board recommended to implement well-sequenced tax reform measures that would create fiscal space for social spending and for much needed reconstruction and infrastructure investment.

Directors stressed that the 2011 budget would be a key step in embarking on a credible reform strategy, aimed at broadening the tax base, simplifying the tax and tariff systems, and improving tax administration.

The IMF commended the Central Bank for bringing inflation under control and endorsed the Bank's current monetary policy stance.
"Given weak demand pressures and sluggish credit growth, there may be room for further cuts in interest rates, while being watchful for a possible recurrence of inflation," the IMF said.

The global monetary institute said the Sri Lanka's post-war economic recovery is gaining momentum, and output is expected to grow by 7 percent in 2010 due to strong growth in the agricultural and services sectors.

The IMF expects the exports to grow modestly this year, and growth in tourism and remittances to remain robust. It says that all signs point to a strong pickup of imports this year, with further growth expected for 2011 resulting in a widening of the current account deficit.

"The 2010 budget passed by parliament in June entails a deficit of 8 percent, incorporating sizable cuts in recurrent spending while allowing for significant spending on infrastructure and reconstruction," the statement noted.

Fiscal performance in the first eight months of this year is in line with the full-year deficit target, with a recovery in budget revenues driven mainly by buoyant import-related taxes, it pointed out.

Central Bank's recent monetary policy has been appropriate but there are few signs of demand pressures, the IMF said.

The IMF agreed that government's financial sector reform agenda is on track with some key regulatory gaps addressed by the measures taken to regulate credit card companies and submission of amendments to the Finance Business Act.