core sector communique

IMF Executive Board Completes Sixth Review Under the Stand-By Arrangement for Sri Lanka and Approves US $218.3 Million Disbursement

April 4, 2011

The Executive Board of the International Monetary Fund (IMF) today completed the sixth 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$ 218.3 million), bringing total disbursements under the arrangement to an amount equivalent to SDR 1.10 billion (about US$ 1.75 billion ).

The Executive Board also approved a waiver of applicability for the three end-March performance criterions on (i) the net international reserve target (ii) reserve money and (iii) net domestic financing of the central government. A rephasing of the remaining disbursements was also approved by the Board.

The SBA was approved on July 24, 2009 (see Press Release No. 09/266) for an amount equivalent to SDR 1.65 billion (about US$ 2.62 billion), or 400 percent of Sri Lanka's quota.

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

“The Sri Lankan economy continues to make progress under the Fund-supported program and overall macroeconomic developments remain favorable. Growth is strong, inflation remains in single digits, and reserves are at a comfortable level. Recent heavy rains and flooding will significantly damage the various crops, as well as rural infrastructure. However, given the size and strength of the economy, the overall impact on output growth is expected to be limited.

“The 2010 budget deficit target has been met and budget developments so far in 2011 are broadly in line with expectations. The authorities’ plan to handle the flood-related expenses by reallocating and reprioritizing expenditure within the existing budget will help maintain the program’s deficit target for 2011.

“Reforming the two state energy enterprises and bringing their combined operating balance to zero this year would ensure the durability of fiscal adjustment. To this end, it will be important to allow adjustment of domestic prices to reflect fluctuations in international fuel prices.

“Steps to expand the liquidity management tools at the central bank’s disposal will help maintain its control over monetary conditions. Going forward, monetary policy will need to be vigilant about the possible second-round effects from higher prices on core inflation and strike the right balance between supporting economic growth and preventing excess liquidity from fueling inflationary pressures. Allowing sufficient two-way flexibility of the exchange rate will help support the external position and meet the reserves target.

“Financial sector reforms will continue to focus on strengthening the resilience of this sector, and expand the scope of financing options available to the private sector by increasing the depth of the corporate bond market and improving the functioning of the stock market.”