COLOMBO The International Monetary Fund expects Sri Lanka's economy to grow at 6.5 percent this year and in 2014, less than the central bank's forecast, a senior Fund official said, and remains concerned about medium-term risks from high budget deficits.
Naoyuki Shinohara, deputy managing director of the IMF, said measures taken to achieve macroeconomic stability were commendable, but the government still needed to build a policy buffer to address unexpected events.
"We expect 6.5 percent GDP growth for this year and the same for the next year," Shinohara told reporters.
"I am not sure if it is resilient. But Sri Lanka is a special case, with a long period of internal conflict and now a period of peace... There is a huge room for the economy to grow."
The IMF growth outlook for the $59-billion economy is below the central bank's outlook of a minimum of 7.2 percent expansion this year and more than 7.5 percent in 2014.
The economy grew at 6.4 percent last year, its slowest pace in three years, down from a record 8.3 percent in 2011.
Shinohara said Sri Lanka faced external risks in the short term arising from the global slowdown that could hit its exports and a possible U.S. Federal Reserve decision to taper its asset buying program.
"Over the medium term, I think the economy here still faces challenges like budget deficits, investment climate and business climate," he said.
Sri Lanka needed stronger infrastructure and transparency to improve its investment climate, he added.
In a separate central bank statement on Tuesday, Shinohara said he signaled the importance of pursuing a cautious monetary policy and the need to assess the impact of monetary easing already undertaken.
Sri Lanka, despite IMF advice to hold its key monetary policy rates, cut them by 50 basis points in October to multi-year lows to boost economic growth.
Under a $2.6-billion IMF loan program, Sri Lanka reduced its budget deficit to a 19-year low of 6.4 percent of gross domestic product last year from near 10 percent in 2009. The central bank has forecast a deficit of 5.2 percent next year.
The government is pledged to reducing the deficit to 5.8 percent of GDP this year and cutting it further, he said.
"That's a strong commitment and we welcome that very much. So that means there is no need to borrow more from outside in order to finance the budget deficit," he said.
Sri Lanka has been borrowing from the international capital market since 2007 besides other commercial borrowing, mainly from China, to revive long neglected infrastructure since the end of a 26-year war against Tamil separatists in 2009.
Rating agencies and economists have warned of a potential risk due to increasing external commercial debt.
Shinohara, however, said the current debt-to-GDP ratio of around 80 percent was not alarming, though the government needed to strengthen a "policy buffer" to face contingencies.
That buffer needs to "reduce the budget deficit and contain inflationary expectations", he said.
(Reporting by Shihar Aneez; Editing by Ron Popeski and Clarence Fernandez)