IMF Executive Board Completes Seventh Review Under the Stand-By Arrangement for Sri Lanka and Approves US$ 426.8 Million Disbursement Sri Lanka

This paper discusses Sri Lanka’s seventh review under the Stand-By Arrangement and requests for waivers of nonobservance of performance criteria. The strong economic recovery continued in 2011, with growth estimated at 8¼ percent. Activity was robust across all sectors, supported by healthy exports and strong growth in domestic demand. Agriculture recovered from flooding early in the year, and is expected to grow at 6 percent. The rupee came under increasing downward pressure in the second half of 2011, especially after the size of the trade deficit became apparent and started to weigh on sentiment.

Abstract

This paper discusses Sri Lanka’s seventh review under the Stand-By Arrangement and requests for waivers of nonobservance of performance criteria. The strong economic recovery continued in 2011, with growth estimated at 8¼ percent. Activity was robust across all sectors, supported by healthy exports and strong growth in domestic demand. Agriculture recovered from flooding early in the year, and is expected to grow at 6 percent. The rupee came under increasing downward pressure in the second half of 2011, especially after the size of the trade deficit became apparent and started to weigh on sentiment.

The Executive Board of the International Monetary Fund (IMF) today completed the seventh review of Sri Lanka’s economic performance under a program supported by a Stand-By Arrangement (SBA). The completion of the review enables the immediate disbursement of an amount equivalent to SDR 275.6 million (about US$ 426.8 million), bringing total disbursements under the arrangement to an amount equivalent to SDR 1.378 billion (about US$ 2.13 billion). In addition, the Executive Board approved an extension of the arrangement period to July 23, 2012, to allow time for the completion of the eighth and final review.

The Executive Board also approved waivers of nonobservance for end-December performance criteria on net international reserves and reserve money. A rephasing of the remaining disbursements was also approved by the Board.

The SBA was approved on July 24, 2009 (see Press Release No. 09/266) for an amount equivalent to SDR 1.65 billion (about US$ 2.56 billion), or 400 percent of Sri Lanka’s quota.

Following the Executive Board’s discussion on Sri Lanka, Mr. Min Zhu, Deputy Managing Director and Acting Chair, stated:

“While the strong economic recovery continued in 2011, and inflation remained subdued, a combination of rapid credit growth and a tightly managed exchange rate caused the external current account deficit to widen and external reserves to fall sharply. As a result of higher oil prices, the state energy enterprises also continued to run significant losses.

“The authorities have recently introduced a broad package of measures to rein in the current account deficit, stem the reserve loss, and bolster fiscal performance. Monetary and credit policy have been tightened, petroleum and electricity prices increased, petroleum taxes raised, and the rupee trading band abolished to allow the exchange rate to adjust more flexibly. The authorities are taking steps to mitigate the adverse impact on the most vulnerable. Fiscal policy will also continue on a consolidation path, with the 2012 Budget targeting a reduction in the deficit to 6.2 percent of GDP.

“The authorities intend to use the forthcoming FSAP update to strengthen the financial system further. Continued structural reforms to place the state owned energy enterprises on a financially sound footing will reduce demands on the budget.

“The adjustment measures implemented by the authorities have placed the economy on a more sustainable trajectory. However, it will take time for the new monetary and exchange rate regime to become fully established, and the authorities will need to stand ready to adjust policies further to stabilize external reserves, especially if the global environment becomes less favorable,” Mr. Zhu said.

Sri Lanka: Seventh Review under the Stand-By Arrangement and Requests for Waivers of Nonobservance of Performance Criteria, Extension of the Arrangement Period, Rephasing of Purchases, and Establishment of Performance Criteria—Staff Report; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Sri Lanka.
Author: International Monetary Fund