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Commends government for peace moves, fiscal reforms: IMF predicts 4 per cent growth in economy

The International Monetary Fund (IMF) in its latest report on Sri Lanka issued yesterday predicted an economic growth of 3.5 per cent to 4 percent by end of 2002.

The IMF report welcomed the fact that the ceasefire is already providing an economic boost to the country through lower security spending and renewed economic activity in the country's conflict-affected North and East.

Sustained peace would allow budgetary resources to be reallocated to social programs and building or rehabilitating infrastructure, especially in the war-torn parts of the country, it said.

"IMF Executive Directors noted that Sri Lanka is at a critical juncture-despite recent improvements, the macroeconomic situation remains fragile, and achieving sustainable high growth requires major adjustments," the report added.

The report, issued at the end of Article IV consultations with Sri Lanka, commended the government for achieving key macroeconomic objectives under the Stand-By Arrangement through which the IMF released a third tranche of US$ 64 million recently.

Following victory in the December elections, the United National Front (UNF) government committed to deal with the major economic challenges it faced and move ahead with the reforms program. The new government presented a strong budget in March 2002, which demonstrated their commitment to fiscal consolidation and structural reforms to lay the foundations for private sector led growth in the medium-term, the IMF said.

IMF directors have noted that a major challenge for the authorities is to press ahead with deeper structural reform measures to promote growth and reduce poverty. They endorsed the authorities' structural reform agenda and were encouraged by the initial steps taken on the structural front.

The measures to restructure the Ceylon Petroleum Corporation (CPC) and the Ceylon Electricity Board (CEB), and to invite private participation in those companies under an appropriate regulatory framework, were welcomed. More ambitious privatization was recommended, which could provide resources for government debt reduction, and contribute to long-term economic growth and private sector development.

Substantial progress was made on the macroeconomic stabilization front during the first half of 2002. Inflation showed a trend decline-headline inflation was in the range 8-9 percent for the 12 months to August, consistent with the year end target.

GDP growth bottomed out in the first quarter GDP. The external position has stabilized and the rupee remained broadly stable. The Central Bank of Sri Lanka continued to maintain a broadly prudent monetary stance. Fiscal consolidation has began which is a key program objective. The financial position of the public corporations also stabilized over January-June 2002.

Directors stressed that the 2003 budget will need to continue the path of fiscal consolidation, with the focus on controlling current expenditures.

They also welcomed the authorities' intention to press ahead with fiscal consolidation, which is essential to ensuring fiscal and external sustainability over the medium term.

Over the medium term, further reform of public expenditure and the financial sector, restructuring of public sector institutions, strengthening the tax collection agencies, and labour market reforms would serve to improve public sector effectiveness and promote private sector growth, the report stated.

The IMF noted the risk of drought and said long-term electricity shortages are still a major concern. Directors were also concerned that any resumption of political uncertainties could slow down the peace momentum, and undermine the fiscal position.

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Copyright 2001 The Associated Newspapers of Ceylon Ltd.
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