Sri Lanka can have growth, low inflation if budget deficit is tamed: IMF

Oct 20, 2010 (LBO) – Sri Lanka’s recently controlled inflation and an economic recovery can be maintained if state deficit spending can be tamed, giving ordinary citizens a chance to engage in growth creating economic activities, the International Monetary Fund has said. The IMF, in a statement issued following the annual ‘Article IV’ consultations with Sri Lanka commended the central bank for keeping inflation under control and stabilizing economy and allowing interest rates to be cut.

Good Foundation

“The current favorable environment offers a window of opportunity to address remaining macroeconomic challenges and build a strong foundation for private sector-led growth,” the IMF’s executive directors said in an assessment of the economy.

“This will require continued fiscal adjustment, a more efficient capital market, and an improved business environment.”

Sri Lanka’s state spends much more than it can extract as taxes from citizens, appropriates their savings and pushing interest rates to high levels making it difficult for citizens to borrow to build a house or run a business, a process economists call crowding out.

More often than not the central bank is pressured to print money to keep interest rates down artificially driving inflati