IMF: Sri Lanka should stand ready to tighten monetary policy

IMF: Sri Lanka should stand ready to tighten monetary policy

SAM Staff,

The International Monetary Fund said on Friday Sri Lanka’s central bank should be ready to tighten monetary policy to contain inflation and credit growth.

It also projected economic growth below 4.5 percent this year.

The IMF’s stance, which is unchanged from a June statement, comes three days after the central bank held the key monetary policy rates steady, saying past steps were keeping inflation and credit growth under control, as policymakers focus on supporting an economy hit by extreme weather.

“The central bank should continue to be remain vigilant in monitoring inflation pressures and stand ready to tighten monetary policy if needed to contain inflation or credit growth,” Jaewoo Lee, the visiting IMF mission leader, told reporters in Colombo.

The central bank’s previous four tightening steps since December 2015 have had some impact on loans growth. Annual private sector credit growth of 18.0 percent in August was well off a near four-year high of 28.5 percent hit in July 2016.

Consumer inflation, however, was up 7.1 percent in September from a year earlier, accelerating from the last month’s 6.0 percent, mainly due to higher food prices in the wake of extreme weather.

“Overall, macroeconomic performance has been mixed. Growth has been subdued and inflationary pressures have increased reflecting the drought since late 2016 and the floods earlier this year,” Lee said.

“Growth is projected to remain below 4.5 percent for 2017, and to rebound next year as agricultural production normalizes and infrastructure projects pick up.”

He also said headline inflation is expected to stabilise in the mid-single digits as weather-related supply disruptions dissipate.

The IMF also said fiscal consolidation based on stronger revenues remains essential for reducing high public debt and further broadening of the tax base is needed to fund the social and development spending in the 2018 budget.