core sector communique

IMF Executive Board Completes Fifth Review Under the Stand-By Arrangement for Sri Lanka and Approves US$216.6 Million Disbursement

February 2, 2011

The Executive Board of the International Monetary Fund (IMF) today completed the fifth review of Sri Lanka's economic performance under a program supported by a Stand-By Arrangement (SBA). The completion of the review enables the immediate disbursement of an amount equivalent to SDR 137.8 million (about US$216.6 million), bringing total disbursements under the arrangement to an amount equivalent to SDR 964.6 million (about US$1.516 billion).

The Executive Board also approved the authorities’ request for a waiver of applicability of the end-December performance criterion on net domestic financing for which data are not yet available, as well as a waiver of non-observance of the end-December performance criterion on net international reserves.

The SBA was approved on July 24, 2009 (see Press Release No. 09/266) for an amount equivalent to SDR 1,653.6 million (about US$2,599.4 million) or 400 percent of Sri Lanka's quota.

Following the Executive Board's discussion on Sri Lanka, Mr. Naoyuki Shinohara, Deputy Managing Director and Acting Chair, stated:

“The Sri Lankan authorities have made good progress under the Fund-supported program and macroeconomic developments continue to be favorable. Growth is strengthening; inflation remains in check, despite some pressure in food and energy prices; and imports have recovered. With strong remittance inflows, gross reserves remain at comfortable levels.

Improvements in fiscal performance are encouraging. The 2010 budget execution addressed past fiscal slippages and bolstered the credibility of fiscal policy. The 2011 budget is generally sound, and reflects the government’s strong commitment to the program’s goals.

The proposed tax reforms and reforms of the Board of Investment’s tax concession regime should result in a more efficient, transparent, and simpler tax system with a broader base. If implemented properly, these reforms should improve tax compliance and deliver durably higher revenue.

“Monetary conditions are stable, and credit has picked up. With few signs of demand-driven inflation pressures, the policy stance remains appropriate, but the central bank should be ready to act to head off any emerging inflation risks. The central bank has been building up reserves while allowing the exchange rate to appreciate. Looking ahead, however, the exchange rate will need to be sufficiently flexible in both directions to safeguard external stability.

“Financial sector reform has continued in line with the program. Going forward, reforms should focus on further strengthening the financial system and expanding funding options for the private sector, including through a deeper corporate bond market and a revamped legal framework for pension funds. ” Mr. Shinohara stated.