Sri Lanka is a ‘rising’ economy at an historical transition, now enjoying macroeconomic stability not enjoyed for some time due to the three-decade conflict, IMF Director Asia Pacific Department, Anoop Singh said.
Speaking on ‘Asia in the New World Order, Implications for a Rising Sri Lanka’ at the Central Bank Training Centre on Friday, he cautioned that the fiscal performance was still weak, that the debt to GDP ratio, inflation and interest rates had a lot more room to go down further.
He pointed out that Sri Lanka lost 2/3 of its official foreign currency reserves towards the end of 2008 and early 2009. "But today, it is very different. Reserves have recovered sharply and it has been dramatic," he said.
"But, we need to be a little cautious. Reserves are indeed healthy, but if we look at reserves in relation to short term debt, then we see that the recovery is not that great. Also when comparing Sri Lanka with other emerging economies, Sri Lanka’s reserves are still much lower," Singh said.
Singh compared the size of reserves in terms of how many months of imports expenditure could be supported by each country.
He said inflation and interest rates have gone through a significant change over the last year.
"Inflation and interest rates have fallen quite significantly, but if we look at inflation and interest rates of other emerging economies there is room for inflation to fall further in Sri Lanka and interest rates to lower as well," Singh said.
The IMF official said Sri Lanka’s economy was rebounding given the growth in private sector credit. "Compared with other emerging economies Sri Lanka’s economic recovery and private sector credit growth is significant," he said.
He said many emerging economies recovered due to high fiscal stimulus and would soon face the challenge of reducing such stimulus, a problem Sri Lanka would not have to face.
"Sri Lanka’s budget deficit is much higher than other emerging economies and so is the debt to GDP ratio, which is in excess of 80 percent. This weakness is well known. But it is important to note that the fiscal policy is turning around," Singh said.
He said there is a significant reduction in the budget deficit planned for 2011 and 2012, where the deficit is expected to reach 5 percent of GDP and it was important for the government to stick to its planned fiscal policy. Singh said more effort was needed to bring down the debt to GDP ratio.
“This is a critical moment to Sri Lanka and it needs to build infrastructure and a knowledge economy,” he said.