Rapid growth but no signs of demand-driven inflationary pressures - IMF Chief

 By Sulochana Ramiah Mohan
“Strong export growth and continued large remittance inflows have supported reserves, but going forward, rapid import growth and high oil prices could put pressure on the balance of payments. In this event, the Central Bank should allow the exchange rate to reflect market forces flexibly and avoid sustained sales of forcing exchange, ensuring that reserves remain healthy and the economy competitive,” said the IMF Head of Mission Dr Brian Aitken, on Friday.
Some of the main points he stressed was that private sector credit growth has been rapid but from a low base and there are not yet signs of demand-driven inflationary pressures. “The CB should be on the look out for signs of overheating and be prepared to adjust to monetary policy accordingly. Banks and finance companies should also guard against a relaxation of lending standards and the accompanying risk of non-performing loans.”
In their conclusion of the mission they revealed that the microeconomic situation in the country is satisfactory and noted that the economic growth slowed somewhat in the first quart of this year reflecting flood-related damage though leading indicators suggest that growth is currently strong across all sectors.
In the discussion with the government in the lead up to a seventh review mission expected in September, the team met with government and CB officials as well as representatives of civil society and the private sector. Of the total 2.5bn US $ Stand-By Agreement, the IMF disposed 1.7mn US $ so far and in September Sri Lanka is likely to receive 400mn US$.
Dr Aitken denied a IMF role in the recent government proposal to go ahead with the private sector pension scheme which was speculated as being a measure taken to ‘please the IMF’. “No we have no say and it’s not part of our programme, as it is an  issue with the government and the private sector to design the social protection scheme. Yet, we would like to see that the government is clear in  its intention on this issue”.
He also went on to say that sustained higher economic growth will require an environment more conductive to domestic and foreign investment.  Increased transparency and improved governance could also bolster market confidence and lead to high investment, he said. However, he said, there is a perception that the govt is sending some potentially conflicting signals about the role of the private sector in economic development -- which could be deterring investment, and should be addressed.
Talking about the tax reforms initiated in the 2011 budget he cited that the tax revenue is strong and fiscal performance to date remains consistent with the government’s 2011 deficit target of 6% of GDP. “The government has appropriately shifted investment promotion away from granting tax concessions and more steps need to be taken to institutionalize this policy by revising investment guidelines and regulations to provide more clarity to prospective investors while safeguarding tax revenue,” he added.
Source : Lakbima