Sri Lanka budget, reforms on track, inflation rising: IMF

Dec 14, 2010 (LBO) – Sri Lanka’s 2010 state spending is on track with a planned 8.0 percent of gross domestic product deficit, and a new budget for next year has reformed taxes, but inflation is rising, the International Monetary Fund said. The government also announced an intention to end sweeping tax holidays which if fully implemented “involves a shift away from tax concessions as the principal tool for attracting investment as well as an increase in transparency,” the IMF said.

The economy is expected to grow 7.5 percent in 2010, the mission said, while updated official projections have put growth at 8.0 percent of GDP.

Inflation Generation

The IMF said inflation has risen, mostly driven by food prices. But credit growth was picking up suggesting that the current monetary policy is “appropriate”.

Sri Lanka has a pegged exchange rate monetary system, where inflation is in practice anchored to that of the US dollar which sets a floor for price levels.

But Sri Lanka’s inflation at 7.0 percent in November is higher than that of other dollar soft-pegged countries like China which has recently reported 4.4 percent inflation.

Hong Kong which has a hard peg and no domestic monetary policy has reported 2.6