“The key element is in ensuring macro-economic conditions remain stable,” said Koshy Mathai.
“Inflation, interest rates and the exchange rate must remain stable to create the environment for growth, investment and creation of employment.”
He said the IMF was pleased with the government’s 2010 budget presented to parliament Tuesday with the deficit reduced to eight percent of gross domestic products from 9.9 percent last year.
“It is critical to make sure the fiscal balance is kept under control,” Mathai said.
The government’s forecast of eight percent annual growth was “attainable” and not based on unrealistic revenue or capital spending forecasts.
Mathai said the IMF board had completed their second and third reviews of the program with Sri Lanka and made two disbursements and extended the programme to take into account the government’s medium-term growth strategy.
“This means the disbursement of 408 million dollars coming either today or tomorrow,’ he said.
“We have a fundamentally optimistic view on Sri Lanka’s economic prospects. For 30 years the country has grown at five percent (annually) despite the war absorbing so much human and economic resources.
“Now the burden has been lifted it seems obvious the economy is poised for great growth. But it presupposes that macro-economic conditions are kept stable.”
Sri Lanka’s ethnic war ended in May 2009 resulting in an economic revival.
Foreign exchange reserves have increased “dramatically” to over five billion dollars and there was room to build it further but it is no longer a short-term priority.
“Now the country has the luxury of thinking more about the medium-term economic prospects,” said Mathai.
“Monetary policy is going quite well – we think the central bank policy is absolutely appropriate for the current moment.”
Mathai said fiscal policy was the only area the IMF had raised some concern about given the government’s deficit which led to a “pause” in the IMF programme for Sri Lanka.
The IMF’s 2.5 billion programme was suspended last year when Sri Lanka failed to meet budget deficit reduction targets.
“The 2010 budget and related policy package of the government represents major progress towards strengthening Sri Lanka’s public finances,” Mathai said.
“The government’s aim to reduce the budget deficit is being done in a sensible way, not in an unrealistic reduction in spending, not through artificial curtailment in capital spending.”
The compression in the deficit is being achieved through a reduction in recurrent spending relative to growth in gross domestic product with capital spending kept constant in nominal terms.
As the scope for compressing current spending next year is limited the government plans to boost revenues.
“It is a very important element in the policy package that’s given us a lot of encouragement.”
These include tax reforms to simplify and broad base the system, and increase total revenue collection.
Government plans to reform its investment regime with a new strategy to promote important sectors and do away with tax breaks and reduce red tape for investors were also important, Mathai said.
“There’s also a lot of emphasis on measures to improve the efficiency of state enterprises so they are less of a drain on public finances.”
The extension of the IMF programme means there will more disbursements over a longer period of time. Disbursements are likely to be around 200 million dollars each.
© Lanka Business Online
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