The International Monetary Fund agreed the disbursement of the seventh tranche of a $2.6 billion loan to Sri Lanka, saying its economic growth was strong while warning that excess liquidity could stoke inflation. Sri Lanka's government has forecast record 8.5 percent growth this year, while the IMF puts it at a more conservative 7 percent, in spite of increasing supply-side inflationary pressures on the island's $50 billion economy.
"We do not see a need for the central bank to adjust policy to supply shocks at this point," IMF Country Representative Koshy Mathai told a press conference on Tuesday. The Indian Ocean nation broke with Asian peers by lowering interest rates in January, aiming to spur post-war growth and forecasting 2011 inflation would remain in single digits.
But flooding in January and February that caused at least $500 million in damage to crops, boosted inflation, which rose to its highest level in two years at 8.6 percent in March. Analysts have said Sri Lanka could miss this year's revised deficit target of 6.75 percent of GDP due to the flooding. Sri Lanka on Tuesday said it would present a 2012 budget that would meet that year's 5.25 percent IMF target.
The IMF late on Monday in a statement said it expected flooding to have limited impact on growth "given the size and strength of the economy," while the central bank said it was too early to say flooding would force a change in the 2011 target. The seventh tranche is worth $218.3 million, part of a loan programme approved in July 2009 after Sri Lanka's government emerged victorious in a quarter-century separatist war. Besides higher food prices, serial unrest in oil-producing Middle Eastern and North African countries has threatened to push inflation higher in Sri Lanka as in many other countries.
The central bank has said high oil prices are the only risk this year to growth, which it is trying to spur by keeping interest rates low. The economy expanded at 8.0 percent in 2010, the fastest in 32 years. Economists however have begun warning of the threat of demand-driven inflation picking up because of excess cash in the system. Mathai said there were no signs yet of demand-pull inflation, but the central bank should be vigilant.
"We think that going forward, and the central bank fully agrees, that trying to figure out how to lock up that excess liquidity so that it doesn't go into irresponsible credit growth, that it doesn't fuel unnecessary inflation, is a very important thing," Mathai told a press conference.
He put credit growth at 30 percent, and said exchange rate flexibility, a long-time IMF prescription for Sri Lanka, would help manage the external position and meet the reserves target. Sri Lanka presently manages the rupee currency to avoid volatility and prevent imported inflation.
Comments
Comments are closed for this article.