The economic conditions have shown remarkable progress with low inflation, which is expected to be remained in single digits for the year, strong external balances, a high rate of remittance inflows, comfortable levels of gross reserves and rapidly improving tourism prospects, the International Monetary Fund (IMF) said.

In a comprehensive report on the US$ 2.6 billion stand-by-arrangement to Sri Lanka, the IMF said Sri Lanka's overall economic conditions are improving as expected, and the economy is likely to show strong growth this year.

However, the government is yet to reduce the deficit and take action on tax reforms which have been delayed by one year.

The report noted that although the immediate risk of a balance of payments crisis has receded and much progress has been made in rebuilding reserves and advancing financial sector reform, 2009 was a lost year in terms of deficit reduction and tax reform.

Though the Central Bank's policy stance so far has been appropriate, the IMF suggested tightening the monetary policy further if credit picks up sharply in the coming months.
"The exchange rate will need to show more flexibility if rapid growth of imports begins putting pressure on the balance of payments," the lender said.

The government needs to take further steps to put in place legislative changes to permanently reform tax concessions and to simplify and broaden the bases for the VAT and income taxes, it suggested.

Acknowledging that the 2010 fiscal performance and the recently-enacted tax reforms have helped to build the government's credibility toward meeting the program's goals, the IMF said, if this is to continue, the government needs to meet all of its deficit targets enact the promised additional tax reform measures in the 2011 budget.

Please find the full report at:

http://www.imf.org/external/pubs/ft/scr/2010/cr10333.pdf