The International Monetary Fund (IMF) says Sri Lanka’s economy has been set on a more sustainable footing by its government’s tough new monetary and fiscal policies.
The global lender, which is likely to approve funding of around $420 million, the last tranche of a $2.6 billion loan to Sri Lanka, after an IMF executive committee meeting in Washington later on Friday, said Colombo’s tough policy measures will yield sustainable growth.
“While acknowledging the economy is in pain; I would say you all should be jumping up and down with joy that the right policies have been implemented and the fundamentals of the economy have been set on a more sustainable footing,” Koshy Mathai, Sri Lanka’s IMF resident representative told a forum in Colombo late on Thursday.
“No use having a party, when you know that party is going to end with a crash. Now we are no longer in that situation,” he said. “I think the key here is policy flexibility but also policy consistency and stability.”
He said the new policy measures had minimised unforeseen future shocks to the $59 billion economy.
“Good times are here in the sense that we can see a future of more sustainable growth, more sustainable progress for the country without any fear that there are going to be problems cropping up underneath.”
Sri Lanka has implemented tough monetary and fiscal policies early this year mainly to avert a balance-of-payments crisis by reducing its trade deficit.
Since February, the central bank has raised policy rates twice to more than two-and-a-half year highs, allowed flexibility in the rupee currency, and limited bank credit to make imports expensive. The rupee has depreciated more than 16 per cent since November.
The government also raised fuel prices and taxes on many imports, pushing up the prices of local goods and services.
“We now have an economy that is underpinned by good policy fundamentals, we now have the commitment by the central bank and the government to run policies in a flexible way,” he said.
“These are all shock absorbers for the economy. And when we are hit by shocks from the outside world...especially at these uncertain global times, it’s useful to have policy flexibility so that we can respond.”
The tough policy measures drove year-on-year inflation to a 41-month high of 9.3 per cent last month, trimming the IMF’s growth forecast to 6.75 per cent from its earlier estimate of 7.5 per cent. However, Mathai said, the inflation spike was not a concern.
“I don’t want to get too troubled on that, because we see it as more of an increase in the price level rather than an increase in inflationary momentum (that) is going to continue month after month.”