IMF comment on ‘controversial’ Working Paper

Sri Lankan authorities have taken important steps to address inflation, according to a top International Monetary Fund (IMF) official, who added that the government took the ‘economically correct and politically difficult step’ of allowing price rises to pass through by phasing out food and fuel subsidies during the second half of 2007.

IMF Director of Asia and the Pacific, David Burton, said the Central Bank of Sri Lanka (CB) also has taken welcome steps to tighten monetary policy to combat inflation. Burton, in a letter published in the Lanka Business Online (LBO) website, referred to the IMF working paper that was recently published on the pass through of external shocks to inflation in Sri Lanka.

The paper, which examined the causes of inflation in Sri Lanka and used statistical analysis to investigate how external shocks and events beyond the governments control contributed to inflation, drew a lot of attention in Sri Lanka.

According to the letter, Burton said the analysis indicated that such shocks explained about 25 percent of the variation in Sri Lanka's consumer price inflation between January 2003 – July 2007 while 16 percent was explained by monetary growth and excess demand and the rest by other factors such as changes in government subsidies and volatile domestic food prices.

Based on these findings, Burton said that the paper concluded that domestic policies play a very important role in containing inflation, a view that is consistent with those of the IMF's 2007 Article IV report on Sri Lanka with the experience of other countries.

'In this context, it is important to note that the staff study only looks at data up to July 2007, and that it does not take account of the surge in world commodity prices that has been a big cause of the run up in headline inflation in Sri Lanka from 13.5 percent in July 2007 to 25 percent in April 2008."

'The authorities are right to be concerned about the level of headline inflation, and the IMF supports their goal of bringing it down to single digits. This is why the 2007 Article IV report backed continued efforts to tighten monetary policy and to reduce the budget deficit,' Burton further said.