Sri Lanka cautioned on foreign borrowings by IMF, inflation watch urged

July 30, 2014 (LBO) - The International Monetary Fund has cautioned Sri Lanka on foreign borrowings by the state and banks and urged authorities to watch inflation closely and be prepared to raise rates.



"Recent improvements in the trade and current account balances notwithstanding, Sri Lanka remains vulnerable to external shocks," the IMF's executive board said following report by a mission which engaged in annual Article IV consultations with the country.

"Medium-term sustainability will depend on maintaining an outward orientation, diversification of the export structure, and a judicious use of foreign borrowing—particularly given the rapid increase in debt servicing costs that have accompanied the shift from bilateral concessional debt to new loans on commercial terms."

A Market Access Debt Sustainability Analysis (MAC-DSA) of Sri Lanka by the IMF has found that Sri Lanka's debt sustainability was sensitive growth and foreign exchange shocks.

"The staff urges caution with respect to external borrowing through the banking system.

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Sri Lanka is recovering from a balance of payments crisis in 2011/2012 triggered by high credit growth and weak credit over the past year has allowed t