IMF gives Sri Lanka $427 million loan

| AFP

( April 03, 2012, Washington DC, Sri Lanka Guardian) The International Monetary Fund on Monday approved a $427 million loan for Sri Lanka, hoping to shore up government coffers that have been ravaged by a massive trade deficit.

A man displays 1,000 rupee notes

in Colombo (AFP/File, Ishara S.Kodikara)

The Washington-based lender said that Sri Lanka's economic recovery continued in 2011, but easy access to credit and a rigid exchange rate had helped extend long-running trade imbalances.

Last year's trade deficit hit nearly $10 billion, or a fifth of the country's GDP, imposing a massive strain on the country's dwindling foreign reserves and leaving the island exposed to external shocks.

Since 2009 the IMF has lent Sri Lanka $2.13 billion in an effort to reform the country's economy and improve the government's budget in the wake of a four decades-long ethic war.

The country's foreign currency reserves have been decimated, leaving little cash on hand for a government that is also running a high budget deficit.

"The authorities have recently introduced a broad package of measures," noted the IMF's Min Zhu.

The government has allowed the rupee to depreciate and slapped credit ceilings on commercial banks to discourage loans that could fuel further imports.

The country needs to borrow heavily to finance the trade deficit and repay debt which could push the country into a vicious debt cycle, experts warn. The government has insisted, however, that it does not risk a sovereign default.

Copyright © 2012 AFP. All rights reserved.

Full text of press release issued by the IMF follows;

IMF Executive Board Completes Seventh Review Under the Stand-By Arrangement for Sri Lanka and Approves US$ 426.8 Million Disbursement

Press Release No. 12/117

April 2, 2012

The Executive Board of the International Monetary Fund (IMF) today completed the seventh review of Sri Lanka's economic performance under a program supported by a Stand-By Arrangement (SBA). The completion of the review enables the immediate disbursement of an amount equivalent to SDR 275.6 million (about US$ 426.8 million), bringing total disbursements under the arrangement to an amount equivalent to SDR 1.378 billion (about US$ 2.13 billion). In addition, the Executive Board approved an extension of the arrangement period to July 23, 2012, to allow time for the completion of the eighth and final review.

The Executive Board also approved waivers of nonobservance for end-December performance criteria on net international reserves and reserve money. A rephasing of the remaining disbursements was also approved by the Board.

The SBA was approved on July 24, 2009 (see Press Release No. 09/266) for an amount equivalent to SDR 1.65 billion (about US$ 2.56 billion), or 400 percent of Sri Lanka's quota.

Following the Executive Board's discussion on Sri Lanka, Mr. Min Zhu, Deputy Managing Director and Acting Chair, stated:

“While the strong economic recovery continued in 2011, and inflation remained subdued, a combination of rapid credit growth and a tightly managed exchange rate caused the external current account deficit to widen and external reserves to fall sharply. As a result of higher oil prices, the state energy enterprises also continued to run significant losses.

“The authorities have recently introduced a broad package of measures to rein in the current account deficit, stem the reserve loss, and bolster fiscal performance. Monetary and credit policy have been tightened, petroleum and electricity prices increased, petroleum taxes raised, and the rupee trading band abolished to allow the exchange rate to adjust more flexibly. The authorities are taking steps to mitigate the adverse impact on the most vulnerable. Fiscal policy will also continue on a consolidation path, with the 2012 Budget targeting a reduction in the deficit to 6.2 percent of GDP.

“The authorities intend to use the forthcoming FSAP update to strengthen the financial system further. Continued structural reforms to place the state owned energy enterprises on a financially sound footing will reduce demands on the budget.

“The adjustment measures implemented by the authorities have placed the economy on a more sustainable trajectory. However, it will take time for the new monetary and exchange rate regime to become fully established, and the authorities will need to stand ready to adjust policies further to stabilize external reserves, especially if the global environment becomes less favorable,” Mr. Zhu said.

IMF EXTERNAL RELATIONS DEPARTMENT

Public Affairs Media Relations

E-mail: publicaffairs@imf.org Phone: 202-623-7100

Fax: 202-623-6278 Fax: 202-623-6772