IMF welcomes Sri Lanka monetary and fiscal tightening; clarifies external shock study

May 02, 2008 (LBO) – The International Monetary Fund says it backs moves by Sri Lanka's central bank to tighten monetary policy as well as 'economically correct but politically difficult' decisions by the island to reduce fuel and food subsidies. The head of IMF's Asia Department David Burton says a recent IMF working paper on external shocks was consistent with IMF's 2007 Article IV report which held the view that domestic policies play an important role in inflation, just like other countries.

But Burton says the study only dealt with data up to July 2007 and does not take into account a sharp rise in commodity prices which has played a big role in inflation since then.

The full text of David Burton's statement is published below:

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Dear Sir/Madam:

Our recent IMF Working Paper Pass-Through of External Shocks to Inflation in Sri Lanka has attracted a lot of attention in Sri Lanka and we felt it would be useful to clarify some of the points raised by this discussion.

The Working Paper examined the causes of inflation in Sri Lanka and used statistical analysis to investigate how much external shocks—events beyond the government’s control—contributed to inflation. The analysis indicated that such