May 10, 2013 (LBO) – Sri Lanka has to watch inflation, bank credit, tax revenues, keep monetary policy tight and avoid guaranteeing bank forex borrowings and instead create an environment for foreign direct investments, the International Monetary Fund has said. The executive board of the IMF in a review of Sri Lanka’s economy said Sri Lanka’s economy was facing key challenges of slowing growth and high inflation and gave a nod for post program monitoring.
The IMF has finished a 2.5 billion US dollar bailout last year which rescued the country from two balance of payments crises, brought about by contradictory exchange rate and monetary policies.
IMF director cautioned against easing of monetary policy in the near term, and said the exchange rate should not be defended aggressively.
“Exchange rate flexibility should be maintained to cushion external shocks, while deeper markets and a gradual move toward a flexible inflation targeting regime would strengthen inflation control,” IMF’s executive directors said in a public information notice.
Sri Lanka has an unstable soft-pegged exchange rate where the Central Bank intervenes in the foreign exchange market to maintain a rate and also has a policy interest rate, w