The Executive Board of the International Monetary Fund (IMF) Friday completed the eighth and final review of Sri Lanka's economic performance under the Stand-By Arrangement (SBA) and approved an immediate disbursement of about US$ 415 million.
With this final tranche of the SBA approved on July 24, 2009 for an amount equivalent to 400 percent of Sri Lanka's quota, the global lender has disbursed US$ 2.49 billion to Sri Lanka.
Approving the last installment following the Executive Board's discussion on Sri Lanka, Deputy Managing Director and Acting Chair Naoyuki Shinohara said that Sri Lankan authorities have undertaken substantial macroeconomic policy adjustments to stabilize international reserves.
In a statement Shinohara has suggested Sri Lanka to continue macroeconomic stabilization and structural reforms efforts, in particular maintaining exchange rate flexibility while building international reserves, given the uncertain global outlook.
The Acting Chair has further noted that a "successor arrangement with the Fund (IMF)" would provide valuable support to the Sri Lankan authorities to achieve those goals.
The official has observed that following robust growth in the first quarter of 2012, activity has started moderating in response to policy tightening and weakening global demand.
"Headline inflation has increased, but core inflation remains relatively stable, while tighter monetary and credit policies have begun slowing credit and import growth. The external current account deficit is narrowing, and international reserves have stabilized," he has noted.
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 growth rate projection to 7.2 percent.
The global lender agreed that Sri Lanka's current monetary policy stance is appropriate, and stressed that "monetary conditions should remain firm in the near term given high headline inflation and possible second-round effects."
"With a flexible exchange rate regime, monetary policy can increasingly focus on inflation control to achieve broader macroeconomic stability while allowing the exchange rate to act as a buffer for external shocks. Foreign exchange market intervention should thus be limited to smoothing excessive volatility, and steps should be taken to gradually deepen the foreign exchange market," the Acting Chair said in his statement.
Shinohara however, observed that the slowdown in economic activity and declining imports are adversely affecting fiscal revenues, while interest payments on government debt are higher than budgeted.
Although the authorities are committed to meeting their 2012 deficit target by restraining expenditure, an intensified effort to strengthen revenue administration is needed, the IMF official noted. He pointed out the need for the Sri Lankan government to continue structural reforms to put state-owned energy enterprises on a "sound financial footing".
Observing that the ongoing FSAP (Financial Sector Assessment Program) update is assessing potential vulnerabilities in the financial sector, the Acting Chair of the Executive Board cautioned the Sri Lankan authorities to remain vigilant for systemic risks and use the recommendations in the FSAP update to strengthen the financial system further.
Sri Lanka has seen a remarkable progress in the country's economy after the government wiped out the separatist Tamil Tiger rebel group, LTTE, in May 2009 and ended the three-decade long armed conflict.