Energy pricing helps but better monetary policy and fiscal framework needed in Sri Lanka

Sri Lanka’s is now experiencing stronger growth, and declining unemployment.
Though oil prices are now falling, expansionary fiscal policy and accommodative monetary policy continue to destabilize the economy by pushing inflation up and putting pressure on the country’s balance of payments.

The International Monetary Fund this month presented its report on this year’s Article iv consultations with Sri Lanka to its Board.

The IMF is an institution that was set up to help countries with high inflation and balance of payments troubles, not just to give money as a last resort to help tide over a crisis, but also to give sound advice to authorities on how to maintain economic stability so that they do not create crises in the first place.

The following are extracts from an interview aired over ETV’s Money Report program with Luis Valdivieso, IMF Resident Representative in Sri Lanka who also comes from Peru, a country which has seen very high inflation and economic instability. Q: if you could just start off with explaining the article 4 consultation document is and the process that goes on with it?

A: Article IV discussions with Sri Lanka took place in July in Colombo and were concluded by the IMF Executive Board on October 25. Discussions focused on the policies needed to deal with near term problems as well as on medium term issues that need to be looked at so the country can move to a higher and sustainable growth path to reduce the still high level of poverty.

Regarding the near term, Sri Lanka has severe shocks including rising oil prices, the removal of textile and apparel quotas since the beginning of 2005, and the Tsunami. In addition, there are some domestic imbalances, like a sizeable fiscal deficit. Regarding the medium term, the government is in the process of putting forward a development strategy. We are trying to understand fully all the elements of this strategy and try to provide support wherever possible.

In this context, discus