Sri Lanka policy flexibility to bring longer term stability: IMF

Apr 27, 2012 (LBO) – On going policy tightening in Sri Lanka and commitment of policy flexibility, will slow growth and may push up inflation but will bring stability to sustain long term growth, an International Monetary Fund official said. “Yes, growth will slow, inflation will rise, cost of living will rise, but the balance of payments should turn around, diminution of reserves should slow down,” IMF’s resident representative Koshy Mathai said.

“Reserves will be safeguarded, and there will be more sustainability of the growth we have seen so far.”

He was speaking at an inaugural lecture organized by the Gamani Corea Foundation, named after a top Sri Lankan economist.

The central bank has already cut the growth forecast for 2012 to 7.2 percent from 8.0 percent.

In a recent report the IMF forecast inflation of 9.1 percent by end 2012, but Central Bank Governor Nivard Cabraal has said the monetary authority was also aiming for ‘mid-single digit’ inflation this year.

Monetary Stance

A central bank can target and deliver almost any level of inflation, including deflation, but it has to be prepared to keep policy tight enough, and avoid undermining its own actions such as interest rate hikes by ‘quantity e