|No wonder Modapakse is singing ' Peace Tones ' to India for Ceasefire !
Sri Lanka's overvalued currency, reliance on foreign borrowing and poor management of the budget are putting the island's economy at 'serious risk', the International Monetary Fund said Sunday.
The island, which is in the midst of a long-running war with ethnic Tamil Tiger rebels, could have inflation of 23.9 percent by the end of 2008, the IMF said in its just released annual assessment on Sri Lanka.
'Directors expressed concern that the combined build-up of macro economic imbalances, balance sheet vulnerabilities, high inflation, and external financing pressures poses serious risks to economic stability,' the report said.
Inflation in October was flat at 23.4 percent, according to official figures.
The fund urged reforms to ease consumer prices, curb public spending and increase financial supervision to take the pressure off the local currency.
The Washington-based body warned against a plan announced in October by the country's government that would see it raise millions of dollars to pay for a raft of infrastructure projects.
Sri Lanka's Central Bank is currently evaluating proposals to raise a 300 million dollar two-year syndicated loan. The bank is also negotiating another 150 million dollar loan with a foreign commercial bank.
'Raising external finance will become increasingly challenging, and Sri Lanka's external accounts are vulnerable to a reduction in international investor risk appetite,' the IMF said.
Economic growth is expected to slow down from 6.8 percent in 2007, to 6.1 percent in 2008 and 5.8 percent in 2009, the statement said.
The island's foreign reserves have fallen from 3.4 billion dollars in July to 2.6 billion dollars this week as the Central Bank spent hundreds of millions of dollars since September in a bid to shore up the rupee, official figures showed.
The bank figures showed the rupee was overvalued by about 18 percent in June.
The global financial crisis has prompted foreign buyers of Sri Lankan rupee-denominated government bonds to repatriate their investments, putting more pressure on the local currency.
Last week, the central bank said it would allow the rupee greater exchange rate 'flexibility' to spur exports as the global financial crisis forces down the currencies of trade rivals.