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* IMF encouraged by Sri Lanka's strong growth and low inflation, cautions over vulnerabilities
Tue, Dec 3, 2013, 02:46 pm SL Time, ColomboPage News Desk, Sri Lanka.

Dec 03, Washington, DC: The Directors of International Monetary Fund (IMF) Executive Board said they are encouraged by Sri Lanka's strong growth and moderating inflation, and by the economy's resilience despite the recent market turbulence.

However, the Executive Directors cautioned that vulnerabilities stemming from high debt and declining government revenues relative to GDP remain.

The IMF Executive Board made these statements after concluding the Ex-Post Evaluation of Exceptional Access under the 2009 Stand-By Arrangement (SBA), and the first Post-Program discussion with Sri Lanka on November 27, 2013.

According to the Executive Board's assessment Sri Lanka's economy continues to move forward, and has navigated recent market turbulence well.

Although overall GDP growth has been solid, recent indicators underline some areas of concern, the Board's report said. Among the concerns are the trade activity which has been slow to pick up, relatively low tax revenues and public spending (including capital expenditures), and declining private sector credit growth.

Under the current conditions, the global lender projects a real GDP growth of 6.5 percent for 2013, somewhat below the authorities' forecast of 7 to 7.5 percent and year-end inflation at 7 percent.

However, the fiscal consolidation is facing headwinds, the IMF said, noting that despite some important tax reforms introduced in 2012, and the 2013 extension of the VAT to the retail and wholesale sectors, revenue performance has been weak thus far in 2013.

While welcoming the ongoing expenditure restraint, the directors cautioned against further cuts in capital expenditure to meet fiscal targets.

Instead they underlined the importance of putting tax revenues on an upward trajectory. They emphasized, in particular, the need for further improvements in both tax policy and administration, including elimination or rationalization of exemptions and holidays.

The Executive Directors, welcoming Central Bank's move to a less active intervention strategy, emphasized the need to allow time for the effects of monetary policy to feed through to private credit and money growth before considering a further easing.

While noting progress in financial sector development, and efforts to strengthen supervision and regulation, the directors observed the remaining vulnerabilities, including the recent rise in nonperforming loans, and risks from the increase in external borrowing by banks and private entities on commercial terms.

Given Sri Lanka's high level of debt and potential vulnerability to external shocks, they emphasized close monitoring.

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