IMF welcomed "tightening of monetary policy to address inflationary pressures"

"Directors welcomed the significant tightening of monetary policy to address inflationary pressures," an IMF statement said.

In a public information notice issued on Friday, IMF Executive Directors have commended Sri Lanka for the continuous economic growth over the last few years.

The rate of unemployment and poverty indicators have fallen during the last few years, it said.

The IMF has also commended Sri Lanka's 'bold decision' to increase fuel prices and transport fares.

Credit crunch

However, the IMF has urged Sri Lanka to 'tighten' the monetary system and allow the exchange rate to be flexible.

It had raised concern over the high inflation and increasing external financial pressures.

Amid increased international risk aversion, raising external finance will become increasingly challenging, and Sri Lanka's external accounts are vulnerable to a reduction in international investor risk appetite IMF statement

The IMF projects that the deficit in 2008 between the exports and imports ( -3334 million US$) will be increased to - 4069 million US$ in 2009.

"Amid increased international risk aversion, raising external finance will become increasingly challenging, and Sri Lanka's external accounts are vulnerable to a reduction in international investor risk appetite," it said.

However, Sri Lanka has been 'largely immune to the global financial turbulence', the IMF said.

Cost of war

"Sri Lankan institutions reportedly have little or no direct exposure to U.S. sub-prime assets, while a significant portion of net foreign inflows reflects investments by non-resident Sri Lankans," it said.

However, Prof. Sam Samarasinghe of Tulane University in New Orleans told BBC Sandeshaya that the global turmoil was reflected in the decrease in price of tea and rubber.

"The IMF call to reduce government expenditure is also meant cut down the cost of the war on the LTTE," he added.

The cost of the war for the next year is estimated to be 177 billion rupees, said Prof. Samarasinghe.