Sri Lanka's inflation still high, more policy tightening "desirable":IMF

Last Updated: Tue, Jul 18, 2017 09:00 hrs

* Further monetary tightening is desirable - IMF

* IMF completes delayed second review of $1.5 bln loan

* Sri Lanka awaits $167.2 mln third tranche of loan

* New Inland Revenue Act will support fiscal consolidation - IMF

COLOMBO, July 18 (Reuters) - The International Monetary Fund said on Tuesday that further monetary policy tightening in Sri Lanka "is desirable" until there are clear signs that inflationary pressures are subsiding, and called for more measures to curb strong credit growth.

In a statement after completing its second review of a $1.5 billion loan approved in May last year, the global lender said Sri Lanka's performance under its program has been "broadly satisfactory".

Sri Lanka has tightened monetary policy four times since December 2015, including a 25 basis point hike in March.

"Inflation and credit growth remain on the high side. While monetary policy was tightened in March, further tightening is desirable until clear signs emerge that inflation pressures and credit expansion have subsided," Mitsuhiro Furusawa, acting chair and deputy managing director, said in a statement.

"While financial soundness indicators remain stable, banks’ capital adequacy ratio has declined due to rapid credit growth. Financial sector supervision should be strengthened, and macro-prudential measures could be deployed to rein in credit growth if needed."

The IMF also said the new Inland Revenue Act, which the government has presented in the parliament for tax and revenue reforms, will support fiscal consolidation, make the tax system more efficient and equitable, and generate resources for social and development programs.

The IMF delayed the completion of the review after Sri Lanka missed its end-December foreign exchange reserves target due to heavy outflows after some foreign investors sold government securities.

The central bank last week said the authorities have achieved all end-June targets set by the IMF.

"Fiscal performance has been strong. Targets for the fiscal balance and tax revenue have been met....Nevertheless, Sri Lanka’s high debt burden and gross financing needs require further revenue-based consolidation," Furusawa said.

"Timely progress in structural reforms, including tax administration and energy pricing, will strengthen the platform for durable consolidation."

The completion of the second review will enable the IMF to release a third tranche of aid of about $167.2 million, bringing total disbursements under the arrangement to the equivalent about $501.5 million. (Reporting by Shihar Aneez; Editing by Kim Coghill)



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