Press Release No. 10/207

Press Release: Statement at the Conclusion of the IMF Staff Mission to Sri Lanka

May 21, 2010

An International Monetary Fund (IMF) mission led by Mr. Brian Aitken visited Colombo May 12-21 to hold discussions on performance and policies under the $2.6 billion Stand-By Arrangement, approved on July 24, 2009. The mission met with officials from the Central Bank, the Ministry of Finance & Planning, the Presidential Tax Commission, and other government ministries and departments, as well as representatives of civil society and the private sector. The mission issued the following statement today in Colombo at the conclusion of the visit:

“Overall economic conditions are improving as expected, and the economy is likely to show strong growth this year. External balances are strong, remittance inflows continue at a high rate, tourism prospects continue to improve rapidly, and gross reserves remain at comfortable levels. We continue to assess the central bank’s monetary stance as appropriate—with bank lending only slowly beginning to rebound, and economic growth still below potential, we see little sign of emerging demand-driven inflationary pressures, and average inflation for the year as a whole is expected to remain in the single digits.

“The budget deficit in 2009 exceeded 9¾ percent of GDP, against a program target of 7 percent. The main factors for the overrun were faster-than-expected project disbursements, higher interest payments, weak revenue, and post-conflict rehabilitation and humanitarian expenditures. Since then, the authorities have met the program’s end-March targets for net international reserves, reserve money, and net domestic financing.

“In our discussions, the government has laid out a set of polices intended to correct the slippages and move toward sustainable deficit reduction while securing spending for protecting the most vulnerable in society. They expect to submit to parliament shortly a 2010 budget involving substantial deficit reduction for the year as a whole, driven primarily through savings in recurrent spending. The government is planning to begin undertaking a comprehensive tax reform, drawing on recommendations from the Presidential Tax Commission. They are also considering concrete steps to improve the investment climate. With the near-term external vulnerabilities eased, the government is shifting its emphasis toward more forward-looking growth-enhancing policies that address some of the economy’s key structural weaknesses.

“We are encouraged by these policy proposals which could form the basis for completing this review. The IMF team will now return to Washington to discuss these issues with IMF management and the next steps toward completing the review of the Stand-By Arrangement at the Executive Board.”