The Executive Board of the International Monetary Fund (IMF) yesterday (02) completed its seventh review on Sri Lanka's economic performance under the US$ 2.6 billion Stand-By Agreement (SBA) and approved the immediate disbursement of an amount equivalent to US$ 426.8 million.
With the latest seventh tranche the IMF has granted US$ 2.13 billion to Sri Lanka under the SBA approved on July 24, 2009.
The Executive Board has also approved an extension of the arrangement period to July 23, 2012, to allow time for the completion of the eighth and final review.
The IMF in a press statement released Monday said the Executive Board also approved waivers of nonobservance for end-December performance criteria on net international reserves and reserve money. A rephasing of the remaining disbursements was also approved by the Board.
Following the Executive Board's discussion on Sri Lanka, Mr. Min Zhu, Deputy Managing Director and Acting Chair, said that while Sri Lanka's strong economic recovery continued last year and inflation remained low in single digit levels, a combination of rapid credit growth and a tightly managed exchange rate caused the external current account deficit to widen and external reserves to fall sharply.
As a result of higher oil prices, the state energy enterprises also continued to run significant losses, the Deputy Managing Director noted.
However, Sri Lankan government and the Central Bank in February implemented policy measures to arrest the widening deficit and replenish external reserves.
The imports increased substantially during the last year due to the expansion in domestic economic activity and increased the trade deficit higher than expected which led to implement the policy measures to devalue the rupee and let it free-fall.
The Deputy Managing Director noted in his review that the authorities have recently introduced a broad package of measures to rein in the current account deficit, stem the reserve loss, and bolster fiscal performance.
"Monetary and credit policy have been tightened, petroleum and electricity prices increased, petroleum taxes raised, and the rupee trading band abolished to allow the exchange rate to adjust more flexibly. The authorities are taking steps to mitigate the adverse impact on the most vulnerable. Fiscal policy will also continue on a consolidation path, with the 2012 Budget targeting a reduction in the deficit to 6.2 percent of GDP," Mr. Zhu said in his statement.
He noted that the authorities intend to use the forthcoming FSAP (Financial Sector Assessment Program) update to strengthen the financial system further.
Continued structural reforms to place the state owned energy enterprises on a financially sound footing will reduce demands on the budget, the Deputy Managing Director suggested.
The IMF official said although the adjustment measures implemented by the Sri Lankan authorities have placed the economy on a more sustainable trajectory, it will take time for the new monetary and exchange rate regime to become fully established, and the authorities will need to stand ready to adjust policies further to stabilize external reserves, especially if the global environment becomes less favorable.
Sri Lanka's economy recorded a high growth rate of 8.3 percent for the second consecutive year in 2011 but for 2012, the Central Bank has lowered the projection to 7.2 percent growth rate.