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What
the IMF warned in October 2008
Following
were the warnings issued by the IMF in October 2008 following
its Article 4 consultation with the Government.
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The combined build-up of macroeconomic imbalances, balance
sheet vulnerabilities, high inflation, and external financing
pressures poses serious risks to economic stability.
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Amid increased international risk aversion, raising external
finance will become increasingly challenging, and Sri Lanka’s
external accounts are vulnerable to a reduction in international
investor risk appetite.
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Put in place a comprehensive package of reforms aimed at
bringing down inflation, limiting external risks, and helping
to preserve Sri Lanka’s impressive growth record. This
would need to involve a front-loaded fiscal consolidation,
complemented by monetary tightening, steps toward greater
exchange rate flexibility, and a further strengthening of
financial supervision and regulation.
Implement
promptly measures aimed at broadening the tax base by significantly
rationalizing exemptions and to restrain current spending.
The resulting fiscal space should be used to preserve infrastructure
spending.
Risk of public debt distress arising from the increasing reliance
on dollar-denominated, short-term commercial debt. Need for
further improvements in debt management, in particular by
lengthening the maturity profile of debt to reduce refinancing
risks, and by facilitating non-debt finance for development
spending.
Real effective exchange rate of the rupee is overvalued, and
that the de facto peg risks contributing to external instability
by attracting speculative inflows that could reverse quickly.
Risks to external stability are associated directly with a
loose fiscal policy and a build-up of short-term and foreign-currency
debt.
Additional exchange rate flexibility would help ward off destabilizing
short-term capital inflows, and encouraged the authorities
to move in this direction as part of a comprehensive policy
package that would underpin confidence in the currency.
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