Structural & state enterprise reforms needed for growth: IMF

ECONOMYNEXT - Sri Lanka needs structural reforms to boost growth and has to keep monetary policy tight for stability and state enterprises have to fix particularly energy utilities, the International Monetary Fund has said.

IMF mission chief Jaewoo Lee said Sri Lanka’s performance under its program has been broadly on track with foreign reserve collections ahead of target but reform on state enterprises delayed and progress being made on revenue collections and he budget deficit.

"Nevertheless, Sri Lanka remains vulnerable to shocks given its high level of public debt, large financing needs, and weak external position," he told reporters Friday after the lender released the mission staff report prepared for a December review of the program.

"Therefore, it is important to build on the progress made and accelerate reforms to reduce fiscal and external vulnerabilities.

"Fiscal consolidation should continue, supported by effective tax administration and spending controls."

Lee said they supported the central banks stance of not cutting policy rates at this time with inflation at a high 7 percent.

"On monetary policy, the central bank should maintain a tightening bias to contain inflation and credit growth pressures, while continuing to accumulate reserves accompanied by greater exchange rate flexibility," Lee said.

Sri Lanka’s central bank prints money to finance the budget deficit and also delays interest rate hikes when domestic credit growth picks up, generating balance of payments crises, currency collapses and high inflation, analysts say.

Critics are divided whether the rate cut was done to allow Perpetual Treauries, a primary dealer connected to the son-in-law of then Central Bank Governor Arjuna Mahendran, which had bought bonds at high rates at a rigged auction in February to exit at a profit or due to incompetence or fiscal dominance.

Under the IMF deal Sri Lanka is expected to market price fuel from January and petroleum from September. With the US credit system getting back to normal, global commodity prices have also started to move up.

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