Washington DC (BBN)– Sri Lanka’s overall economy remains strong and gross domestic product is likely to grow about 7.5 percent this year, the International Monetary Fund (IMF) said on Monday.

“Inflation has risen, but this appears to be driven mostly by food prices, and credit growth is picking up as expected, suggesting that the current monetary policy stance remains appropriate,” an IMF statement said.

It also said the trade deficit is widening, as imports recover from their sharp decline in 2009, but remittance inflows continue at a high rate and reserves remain at comfortable levels.

“We continue to believe that the exchange rate should retain the flexibility to ensure that the economy remains competitive,” the IMF added.

The 2011 budget, approved by the Parliament last week, targets further deficit reduction along with substantial reforms to the tax system and the investment promotion regime, in line with the authorities’ policy commitments.

“The tax reform simplifies the system, reduces many rates, and broadens the base. The net revenue impact is expected to be substantially positive, though some uncertainty is unavoidable with such an extensive set of policy changes,” it noted.

The IMF said the new approach to investment promotion, if fully implemented, involves a shift away from tax concessions as the principal tool for attracting investment as well as an increase in transparency.

“No doubt further progress on these and other fronts will be needed to ensure an acceleration of growth and a transformation of the economy, but the reforms announced in the budget are welcome steps,” it added.

BBN/SSR/AD-14Dec10-10:41 am (BST)