Sri Lanka agrees on tight monetary policy with IMF

The Governor of the Central Bank of Sri Lanka, A.S. Jayawardena, told a news conference that it was important to keep a tight monetary policy in a flexible exchange rate, "otherwise it could have an adverse effect on the currency."

Jayawardena's comments came shortly after the IMF on 15 May urged Sri Lanka to maintain a tight monetary policy until inflation declines and its foreign exchange reserves start to increase.

In a press summary of the IMF's annual "Article IV" assessment of the Sri Lankan economy, the Fund generally welcomed government policies including fiscal consolidation, improvements in the financial position of public enterprises, and a move to a flexible exchange rate.

But it cautioned that the government's main short-term economic challenge would be to arrest a deterioration in the fiscal accounts in 2000 by putting security-related spending under control and improving revenue collection.

IMF "directors urged the authorities to maintain tight monetary policy, at least until the fiscal adjustment takes hold, inflation declines, and reserves start to increase."

"Several directors cautioned against any premature easing of interest rates," it said.The governor said the bank hoped to bring down interest rates in the second half of the year."Once the exchange rate reaches stability and the economy stabilises with the IMF package, we feel it should lead to interest rates coming down," Jayawardena said.

Short-term interest rates have shot up more than 10 percentage points since last year when political conflict in the northeast escalated.

However, rates have been trending slightly lower after the IMF last month granted a 14-month $253 million standby credit facility, which would also help replenish the nation's paltry foreign exchange reserves of less than $1 billion.

The bank floated the rupee on 23 Jan, after a series of de facto devaluations since June 2000.