Press Release No. 10/489

Press Release No. 10/489
December 13, 2010

An International Monetary Fund (IMF) mission led by Brian Aitken visited Colombo December 1-10 to conduct discussions for the Fifth Review of the $2.5 billion Stand-By Arrangement, approved on July 24, 2009. The mission met with government and Central Bank officials, as well as representatives of civil society and the private sector. The mission issued the following statement today upon its return to Washington:

“Overall economic conditions remain strong, with GDP likely to grow by around 7½ percent this year. Inflation has risen, but this appears to be driven mostly by food prices, and credit growth is picking up as expected, suggesting that the current monetary policy stance remains appropriate. The trade deficit is widening, as imports recover from their sharp decline in 2009, but remittance inflows continue at a high rate and reserves remain at comfortable levels. We continue to believe that the exchange rate should retain the flexibility to ensure that the economy remains competitive.

“Performance under the program is good, with all end-September performance criteria met. Monthly budget results to date are encouraging and suggest that the 2010 deficit target of 8 percent of GDP is within reach. The authorities’ structural reform agenda under the program also appears to be broadly on track.

“The 2011 budget, approved by Parliament last week, targets further deficit reduction along with substantial reforms to the tax system and the investment promotion regime, in line with the authorities’ policy commitments. The tax reform simplifies the system, reduces many rates, and broadens the base. The net revenue impact is expected to be substantially positive, though some uncertainty is unavoidable with such an extensive set of policy changes. The new approach to investment promotion, if fully implemented, involves a shift away from tax concessions as the principal tool for attracting investment as well as an increase in transparency. No doubt further progress on these and other fronts will be needed to ensure an acceleration of growth and a transformation of the economy, but the reforms announced in the budget are welcome steps.

“While challenges remain, the authorities have made substantial progress toward fiscal and external sustainability. The IMF team has now returned to Washington to consult with IMF management and will monitor developments with the aim of holding an Executive Board meeting on the Fifth Review.”