IMF warns Sri Lanka against interest rate cut

The IMF warned Sri Lanka Thursday about the risk of rising inflation and urged the government not to cut lending rates.

The International Monetary Fund chief in Colombo, Koshy Mathai, said he expected inflation to climb by 1-1.5 percentage points in the short term from the 6.4 percent year-on-year inflation recorded at the end of April.

"We feel that monetary policy should be on hold and it should not be changed prematurely," Mathai said, responding to the Central Bank of Sri Lanka’s comments last week that rates could be eased to revive growth.

Allowing the rupee to devalue through a flexible exchange rate and tightening fiscal and monetary policy earlier last year helped Sri Lanka recover from a balance of payments crisis, but still there were "challenges ahead", he said.

Mathai said the IMF in its just concluded bi-annual review noted that Sri Lanka’s revenue collection was among the lowest in Asia, public investment was also among the lowest and the national debt at 80 percent of GDP was too high.

The central bank cut benchmark lending rates by 25 basis points to 9.5 percent in December and has since signalled it is ready to make further cuts this year.

In February Colombo dropped plans to seek a fresh $1.0-billion loan from the IMF following disagreements over how the money should be spent.

Sri Lanka has completed drawing down a $2.6 billion bailout secured in 2009 when foreign reserves dipped to $1.0 billion.

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