COLOMBO, Feb 10 (Reuters) - Sri Lanka’s economy will grow 5.5 percent in 2010 due to improving domestic demand and potential export growth after the 25-year war ended in 2009 and as global recovery takes hold, the IMF said on Wednesday.
However, the International Monetary Fund said there were concerns about the country’s fiscal deficit which needed to be addressed.
The $40 billion economy, which was hit by a balance of payment crisis early last year, has already received two tranches of a $2.6 billion IMF loan and the third is due soon.
“We continue to see growth around 5.5 percent in 2010,” Koshy Mathai, the IMF director for Sri Lanka, told Reuters in an interview. “The global environment is still not very strong as recovery is slow. On that basis 5.5 percent is a good number.”
Increased domestic economic activities after the end of the war and expected export growth as the global economy recovers will help, he said.
The central bank predicts expansion of around 7 percent, while Sri Lankan President Mahinda Rajapaksa expects 6 percent growth in 2010.
The economy is expected to have expanded at an eight-year low of 3.5 percent last year, according to both the IMF and central bank, from 6 percent in 2008, due to the global financial crisis and past monetary policy measures aimed at combating inflation.
The global lender has set targets for Sri Lanka on reserves, monetary policy, and fiscal deficits for loan disbursement and Mathai said the island had met its July and September targets to get the first two tranches of the loan.
“We think that they would have met the reserve targets and monetary policy targets. Fiscal is the one where the government itself says there is a question,” he said. “We haven’t seen data yet, but one worry is what’s happening on the expenditure side.”
The loan has helped to stabilise the rupee currency LKR= and boost global investor confidence to invest in post-war Sri Lankan government securities and the bourse .CSE. It also helped to stabilise interest rates and to sell a 5-year $500 million sovereign bond last year.
“Now basically there is a stable macro economy. There is fiscal concern that needs to be remedied in order to make sure that things remain stable.”
According to conditions for the loan, Sri Lanka should have reduced its budget deficit to 7 percent last year. Sri Lankan economists estimate the 2009 deficit at over 9 percent on the basis of data for the first six months of the year.
“We will look at that and then look at the September and December performance. Based on that and the policy intentions going forward, we will come to a decision on the third tranche.”
“Sometimes IMF is flexible. Sometimes we are not flexible. It really depends case by case,” he said.
Sri Lanka could issue its third international bond later this year with a longer, 10-year maturity, the central bank governor said in London on Tuesday. [ID:nLDE61821I]
The global lender said Sri Lanka has done well in monetary policy and reserve targets.
“We see right now the monetary policies are in the right place. We don’t see any signs of overheating in the economy. We don’t see demand-driven inflation,” Mathai said.,
Annual inflation, which reached a record high of 28.2 percent in June 2008, slowed to a record low of 0.7 percent in September last year. It hit a nine-month high of 6.5 percent in January.
Foreign currency reserves, which were at an eight-year low of $1.3 billion in March 2009, are now at record high of over $5 billion. Mathai said the central bank should continue to increase its reserves to allow high imports when rapid growth starts. (Editing by Stephen Nisbet)