The International Monetary Fund yesterday said (IMF) the country’s Central Bank should be prepared to tighten the monetary policy in the coming months, citing many factors including the deterioration in the balance of payments (BOP) and pressure on the rupee.
“With the recent acceleration in private sector credit growth and rising core inflation, there is now little scope for further monetary easing,” the IMF Executive Board said concluding its fourth post-programme monitoring (PPM) with Sri Lanka.
IMF, however said the monetary tightening which comes by way of policy rate hikes should be done at a gradual pace.
“Tighter fiscal and monetary policies could help restrict aggregate demand, contain the recent sharp rise in imports, and strengthen the external balance.
However, to be more effective, these policies should be supported by greater exchange rate flexibility, reduced foreign exchange intervention, and efforts to deepen the foreign exchange market, as well as structural reforms to enhance competitiveness.”
Following the reduction of policy rates in April 2015, the Central Bank of Sri Lanka (CBSL) has kept monetary policy unchanged.
Sri Lanka’s October private credit hit 22.2 percent, increasing from 21.3 in the previous month. At the same time has risen since the beginning of 2015, reaching 4.4 percent
Meanwhile, the IMF said the economic outlook for the country remains uncertain and would depend to a large extent on the course set for economic policies in the coming months.
The multilateral lender further said the risk factors for the country were tilted towards
Citing deterioration in BOP, the loss of Central Bank foreign exchange reserves, weak state of public finances and growing public debt, the IMF said the financial risks for the country have increased.
“In view of high public debt, fiscal developments this year pose a risk to the economy and call for ambitious measures in the 2016 budget to put Sri Lanka’s fiscal position on a more sustainable footing,”
Preliminary data indicate that the government fiscal deficit in the first half of 2015 was 3.7 percent of GDP. Tax revenue collection picked up, but not to the extent assumed in the 2015 budget.
Sri Lanka has a very low tax-to-GDP ratio, and high levels of current expenditure constrain needed development spending, limit policy space, and threaten debt sustainability.