Sept 26, Colombo: Although Sri Lanka's GDP growth accelerated to 6.8 percent in the second quarter of 2013, the International Monetary Fund (IMF) expressed doubt whether the trend will continue in the second half of the year.
"However, given moderate credit growth, flat budget revenues, and relatively low growth in non-oil imports, it is not yet clear whether the acceleration in economic growth will continue into the second half of the year," the global lender said Wednesday in a statement issued at the conclusion of its staff mission to Sri Lanka.
An IMF staff mission led by Todd Schneider visited Colombo during September 17-25 to conduct Post-Program Monitoring discussions as part of a routine enhanced surveillance for countries which have had "exceptional access" to IMF resources, as is the case for Sri Lanka, which last year successfully completed a US$ 2.6 billion IMF program.
The mission met with government and central bank officials, as well as civil society and private sector representatives.
Schneider issuing a statement yesterday said the mission now forecasts growth of 6.5 percent in 2013.
The current account deficit narrowed in the first half of 2013, and the balance of payments surplus is expected to widen this year. Non-performing loans have risen somewhat, but the financial system remains relatively strong, the IMF said.
The monetary authority expected the emerging and frontier markets to face a period of slowdown or even reversal of capital inflows with the possible tapering of exceptional monetary stimulus by the U.S. Federal Reserve in the months ahead.
While the rupee has been relatively resilient so far, the balance of external risks for Sri Lanka has shifted to the downside, the IMF mission said.
The IMF stressed that it will be essential to adhere to the flexible exchange rate regime that has been a core component of the policy framework since early 2012 and to limit the intervention to dealing with excessive short-term volatility.
Contingency plans-including a mix of fiscal and monetary policies to counter potential market pressures- should be prepared in anticipation of possible shifts in market conditions, the lender noted.
"New external borrowing should also be done with a close eye to sustainability, and the need to ensure that investments generate the resources needed to service these obligations," the IMF mission concluded.
Considering the risks Sri Lanka facing, the mission recommended that policy rates remain on hold to give time to assess the impact of recent easing.
The IMF mission pointed out that weak revenues on the fiscal side remain a serious challenge and suggested to give priority to reverse the downward trend through reducing exemptions, broadening the tax base (particularly for direct taxes), and strengthening tax administration and compliance.
"Efforts to boost growth should focus on structural measures, such as tariff reform, enhanced revenue mobilization to support capital expenditure, and improvements in the general business climate."
A discussion on Post Program Monitoring on Sri Lanka by the IMF's Executive Board is expected to take place in late November.