The International Monetary Fund (IMF) said late Thursday the Sri Lankan economy continues to show signs of recovery, although below its potential and an uptick in inflation.

The IMF just completed a 10-day visit to Sri Lanka  to hold discussions on performance and policies under the $2.6 billion Stand-By Arrangement, approved by the Board on July 24, 2009. The next step in the process, the IMF said, entails an IMF staff visit to Colombo, following parliamentary elections and the formation of the new cabinet, to discuss with the government its plans for a full-year 2010 budget, including tax reform measures.

“For end-December, the government has met the targets agreed under the program for net international reserves and reserve money. Final data for the overall budget balance are not yet available, but the ceiling on domestic budget borrowing -- consistent with the government’s overall deficit target of 7 percent of GDP -- was exceeded by a substantial amount," the IMF noted. "This mainly reflects faster-than-expected infrastructure project implementation, higher interest payments, and sluggish fourth-quarter revenue growth."

Upon that backdrop, the IMF said it is currently assessing the implications of this outturn for bringing the underlying budget deficit to a sustainable level.

“Despite this higher borrowing, as well as a recent uptick in year-on-year headline inflation, we continue to assess the central bank’s monetary policy stance as appropriate," the IMF said.

With bank lending only slowly beginning to rebound, and economic growth remaining below its potential, the IMF said it sees little sign of emerging demand-driven inflationary pressures.

"The central bank has acted appropriately through its monetary operations by not allowing higher budget spending to be financed through the creation of additional liquidity. The upward trend in inflation in recent months -- reflecting the temporary effects of increases in food and other international commodity prices from low levels in 2009 -- is in line with our expectations and should peak somewhere mid-year before reversing itself in the second half of 2010," the IMF said, noting that this phenomenon is not unique to Sri Lanka and is currently taking place in many other counties as well.

The IMF said it sees inflation for the year as a whole to stabilize in the high single digits.

Source AP