Sri Lanka should act on inflation, budget deficit: IMF

WASHINGTON, Oct 20, 2007 (LBO) – Sri Lanka should pay more attention to rising inflation and address the problem with the country's budget, a top IMF official said. "Inflation has picked up and they need to pay more attention to that," IMF's Asia Pacific Director David Burton said at the launch of the Asia and Pacific Regional Economic Outlook report here.

"And over the medium term they need to do some fiscal adjustments."

Consumer price inflation in the capital Colombo was running at 17.3 percent in September and countrywide inflation was measured at 21 percent in July.

Starting from late May the Sri Lanka rupee also came under pressure from loose monetary policy and subsequent sterilized intervention from the Central Bank. However the rupee fell and stabilized after intervention ended in the last week of August.

Heavy central bank financing of the budget deficit (printing money) has pushed inflation up and also created balance of payments pressure. The government has also appropriated reserves.

At the moment about half of Sri Lanka's monetary base is made up of domestic assets in the form of central bank credit to government.