IMF concludes fourth post-program monitoring

Dec 10, 2015 (LBO) – The International Monetary Fund concluded its fourth Post-Program Monitoring with Sri Lanka, noting a more challenging external environment, macro-financial imbalances and less room available for monetary easing.

“Recent economic developments reflect a more challenging external environment as well as a sharpening of macro-financial imbalances that began to emerge late in 2014,” a statement said.

During the first half of 2015, Sri Lanka’s growth picked up to 5.6 percent from 4.5 percent in 2014, according to the IMF.

Headline inflation fell to negative 0.3 percent in September before rising to 1.7 percent in October, while core inflation, excluding fresh food, transport, and energy prices, rose since the beginning of 2015, reaching 4.4 percent in October.

According to preliminary data, the government fiscal deficit in the first half of 2015 was 3.7 percent of GDP. Although tax revenue collection picked up, it was not to the extent assumed in the 2015 budget.

The central government balance, or budget deficit, is seen at 5.7 percent of GDP this year.

Commenting on the outlook for interest rates, the fund said there was little prospect of further easing.

“With the recent acceleration in private sector credit growth and rising core inflation, there is now little scope for further monetary easing.”

“Most factors—including the deterioration in the balance of payments and pressures on the rupee—suggest that the CBSL should be prepared to tighten monetary policy in the coming months, albeit at a gradual pace.”

The financial sector remains relatively stable, and the authorities are taking measures to tackle remaining vulnerabilities in the nonbank financial sector, the report added.

Prime Minister Ranil Wickremesinghe told Parliament recently that Sri Lanka will consider a support facility from the IMF due to the difficult external economic environment, as a prudential measure.

The statement is available here:

http://www.imf.org/external/np/sec/pr/2015/pr15553.htm