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COLOMBO (AFP) - The International Monetary Fund urged Sri Lanka on Friday to adopt tough measures to cut subsidies, especially on fuel, in order to salvage the economy. In a report on the island's 27-billion dollar economy, the IMF said a decision to move out of a monthly fuel adjustment formula could put government finances under further pressure, should global oil prices remain high.
The state-run Ceylon Electricity Board is likely to incur financial losses of about 20 billion rupees (220 million dollars) in 2007, as the power monopoly is unable to adjust its charges, the global financial lender said.
"Electricity tariffs have fallen well below cost recovery levels. A large part of these losses was financed by loans from public banks, posing risks to the financial sector," the statement said.
Colombo has resisted raising domestic fuel prices for fear of putting upward pressure on consumer prices.
The rate of inflation exceeded 21 percent in August, as authorities partially lifted fuel subsidies, which in turn raised food prices, the IMF said.
The lender forecast average inflation of 17.7 this year -- up from 9.5 percent last year -- and expects it to ease to 11.5 percent in 2008. The country's economic growth was projected at 6.0 percent, down from 7.4 percent in 2006 and 6.0 percent in 2005.
"There are several downside risks," the IMF said.
Despite high oil prices and security uncertainty caused by the protracted 35-year-old ethnic conflict with the country's Tamil minority the IMF said the economy remained resilient, lifting per capita income to about 1,300 dollars. The IMF said that managing the economy in the short-term would be a challenging task and urged authorities to tighten their macro-economic policies.
"There are, however, indications that the economy may be operating at full capacity given rising inflation, a low unemployment rate, and a high current account deficit," the IMF said. It said the medium-term outlook hinged on "a return to political stability" and further tightening monetary policies "in view of the current fiscal risks, strong growth of credit, and inflationary pressures".
"High oil prices, slow fiscal consolidation, and security concerns are key risks to the near term growth-inflation outlook," the report added. Tens of thousands have died since the Tamil Tigers launched an armed struggle for an independent homeland from the majority Sinhalese in 1972.
AFP
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