IMF advocates to hold policy rates

The International Monetary Fund (IMF) on Thursday warned against easing monetary policy this year, in order to prevent further inflationary pressure.

“We recommend holding policy rates at current levels, at least until inflation eases. It is difficult to say how long a tight monetary policy should be maintained. So, the Central Bank will have to respond as the situation develops but we expect policy rates to remain as it is for the rest of the year.

Sri Lanka’s economic growth has been positive when taken in the global context. However it is clearly not where we want it to be. We don’t see high growth figures as being achievable with current policy packages,” IMF Resident Representative, Koshy Mathai  said.

Mathai’s comments on Thursday led the IMF into direct conflict with the position adopted by Central Bank of Sri Lanka (CBSL) Governor Ajith Nivard Cabraal who expressed confidence in the possibility of easing monetary policy in order to spur economic growth.

“We know that the demand-driven pressures are very clearly addressed, so we are quite confident that the time has now come to ease rather than tighten monetary policy.

“Over next few months we will be able to see inflation in the mid-single digit numbers towards the end of this year, the greater focus would have to be for growth.” Cabraal had told Bloomberg wire.

Nevertheless, Mathai stated that inflationary pressure would be one of several key concerns for the country’s economy going forward.

“Inflation could become rather worrying, so authorities will have to be cautious. Figures had dropped slightly but we expect a short-term increase of up to 1.5 per cent as a result of electricity tariff hikes. This is an area that will have to be watched carefully. The focus needs to be on curtailing inflation rather than on GDP,” Mathai noted.

According to CBSL data, Sri Lanka’s economy grew by 6.5 percent in 2012 and is projected to grow at 7.5 per cent this year. The bank went on to forecast 8 percent and 8.3 percent growth in 2014 and 2015 respectively.

Meanwhile, IMF projections for Sri Lanka’s economy stand at 6.3 per cent in 2013 and 6.7 per cent in 2014. (Channa Fernandopulle)