The International Monetary Fund said the current monetary conditions in Sri Lanka are appropriate for supporting the economic recovery.
Issuing a report Friday (18) at the conclusion of an IMF mission to conduct discussions for the Sixth Review of the $2.5 billion Stand-By Arrangement, the global monetary authority said the Sri Lankan economy grew at a strong 7.75 percent in 2010, according to current estimates.
The IMF believes that the exchange rate should be flexible to ensure that Sri Lanka reserves remain healthy and the economy is competitive.
The mission led by Brian Aitken to Colombo from February 9-18 conducted discussions with government and Central Bank officials, and representatives of civil society and the private sector.
Although Inflation has increased slightly due to recent increases in food prices along with the increase in global prices, the credit growth is in line with earlier projections and the property market remains subdued showing no other signs of demand-driven inflationary pressures, the IMF said.
While remittance inflows continue at a high rate and reserves remain at comfortable levels the trade deficit is widening as imports recover from their sharp decline in 2009, the IMF noted.
"We continue to believe that the exchange rate should retain the flexibility to ensure that reserves remain healthy and that the economy is competitive," the IMF said.
The IMF expressed satisfaction that the Sri Lankan authorities continue to execute policies in line with the goals of the SBA approved on July 24, 2009.
"Performance against the end-December targets was satisfactory, with the 2010 budget deficit likely to have been held within the target of 8 percent of GDP," the organization said in its statement noting that the "authorities' structural reform agenda is also broadly on track."
"The shortfall of net international reserves against the end-2010 target was justified by a larger-than-expected paydown of some public-sector foreign exchange liabilities," it said.
Commenting on the recent flooding in the North and East which damaged Sri Lanka's harvest of various crops including rice and vegetables, as well as rural infrastructure, the IMF said any effect on food prices arises from the floods would be temporary.
"Given the strength of the Sri Lankan economy, the overall impact on output growth should be limited," the IMF observed.
"Addressing the impact of the floods may require some reallocation of budget resources, but the authorities feel that it is premature at this stage to revisit their targeted deficit for 2011 of 6.75 percent of GDP," the statement said.
The IMF team is to return to Washington to consult with IMF management. The team would then monitor developments and hold an Executive Board meeting on the Sixth Review.