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Sri Lanka's growth is strong but inflation and debt has to fall: IMF Rep
14 Dec, 2012 08:06:54
Dec 14,2012 (LBO) - Sri Lanka's recent growth has been strong and ahead some of the fastest growing economies in Eastern Europe, Latin America and Asia, but inflation and national debt has to fall, IMF's resident representative Koshy Mathai said.
Economic growth in the last two year has averaged around 8.0 percent which was higher than Hungary, Czechoslovakia, Pakistan, India, Thailand, Russia, Mexico, Chili, Indonesia, Malaysia and Vietnam and Turkey among other countries.

Pretty Good

"Sri Lanka looks pretty good in an international comparison," Mathai told a gathering of bankers in Colombo.

"This year of course growth is going to slow. May be we are looking at 6.5 percent growth - 6 to 7 percent. Even if it drops to that level…we will be better than a vast majority of countries.

On the inflation front, Mathai said Sri Lanka had more to do.

"Inflation has fallen dramatically," Mathai said. "This is an extended period of low inflation we have had - relatively low. It is much better than Sri Lanka's historical performance.

But there is room to go. I think we will all agree that Sri Lanka is still a reasonably high inflation country. There is still room to go."

The Central Bank says there has been more than 40 months of 'single digit inflation', an loose target compared to 2 - 5 percent levels achieved by central Banks of fast growing East Asian nations, except Vietnam which is still trying to get its monetary and fiscal act together.

Inflation Tools

Sri Lanka's banking system has had balance of payments trouble ever since a money printing central bank was created in 1951 abolishing a currency board that had kept the exchange rate fixed from the previous century.

Dollar-pegged Sri Lanka's inflation took off from the 1970s as the US Federal Reserve went off the gold standard and became a paper fiat money following the breakup of the Bretton Woods system.

Sri Lanka's inflation rose from steadily from 2.2 percent in 1967 as the US ratcheted up printing money for the Vietnam War and President Nixon's 'Great Society' program, to 12.3 percent in 1974, immediately after the final break-up of the Smithsonian agreement.

Analysts say from 1978 inflation rocketed to a new level as the Central Bank adopted a 'flexible' exchange rate of allowing the rupee to fall in line with money printed to finance budget deficits, which worsened to historic highs.

During this period a 'crawling peg' and periodic devaluations, allowed Sri Lanka to avoid full blown balance of payments crises at the expense of high inflation.

Inflation hit 26.1 percent in 1980 and 18.0 percent in 1981 around the time gold prices hit 800 US dollars an ounce, from the 35 dollars pre-Bretton levels and the dollar pegged rupee depreciated on top of US generated inflation.

Analysts say since a 2008 balance of payments crisis Sri Lanka's central bank has generated vastly less inflation and better monetary policy allowed the exchange rate to be strong until 2011 when credit taken to manipulate oil prices pushed the monetary system into a crisis.

This week the Central Bank cut rates as inflation spiked to a four year high of 9.5 percent.

Fiscal Outlier

Meanwhile Mathai says while budget deficits have improved both deficit and national debt remained the highest among comparator countries.

"Fiscal policy has always been a weakness in Sri Lanka's macro-economic management and you have had very high debt ratios in the past…," Mathai said.

"And there has been good progress in bringing the deficits down and the debt ratio down as well.

"But the net result is that even though we are around the 80 percent mark now, that is still far too high."

Russia and Chile were running budget surpluses and had state debt of around 10 percent of gross domestic product.

India had budget deficits of over 8 percent and national debt of 70 percent of GDP while Sri Lanka had deficits of around 7.0 percent and national debt of 80 percent of GDP standing out from the crowd.

Many comparator countries, ranging from Turkey, Thailand, Vietnam, Mexico, and Malaysia had had deficits about 5.0 percent or below and state debt of around 50 percent of GDP or below in 2011.

"So Sri Lanka certainly has room to grow in terms of improving the fiscal position," Mathai said.

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3. truth Dec 15
@wadda Podda. I can only wish that more people like you exist in this country. but you know what, the EU is peanuts compared to the problems in the US. the FED prints about ~$90 billion every month and the fools over here are destroying our currency faster than the dying dollar. The day our country is going to have sound economic growth is only when the IMF, WB, and all these monetary institutions come to an end/ leave our country for good and once we get a responsible central bank or abolish the CB. They need to go if we are to tame our govt. end of story. When the US gets into bop trouble, the FED ramps up its printing presses. when we run into bop troubles, the IMF bails us out. Both scenarios are the same. The end result is unbelievably painful.
2. Wadda Podda Dec 15
@thruth. How true. But this applies to most Asian countries as well(about their fake growth and their overvalued stock). IMF, and not desire, is the cause of all sufferings. This so called 'help' from the IMF, ECB, US Treasury etc. only helps prolong matters and kick the can down the street. The future generations are the victims. p> Surely, this time around Europe must be able to rid themselves from their biggest evil(European style socialism). The smart money will soon return to Europe once this monster is chained. Perhaps it would take a few more years as this monster is not give up the fight so easy.
1. truth Dec 15
IMF, doesn't understand that our fake growth is driven by debt and inflation? they need to leave this country alone, stop bailing us out everytime our country runs into a bop crisis. please let the gov solve its own problems. imf only makes it worse.