Vote of confidence in Sri Lanka:

IMF sanctions US$ 2.6 b to boost economy, reconstruction

by our Financial corr.

The International Monetary Fund (IMF) on Friday approved a US$ 2.6 billion loan to Sri Lanka, in a move seen as a vote of confidence in the Government’s economic policies and the North-East reconstruction effort.

This is nearly US$ 700 million more than the US$ 1.9 billion initially requested by the Sri Lankan Government in March this year.

The first $322m tranche of the 20-month loan will be available immediately, with the rest subject to quarterly reviews, the IMF and the Central Bank said.

This is the first major financial aid package to Sri Lanka after the defeat of LTTE terrorism in May.

The Executive Board of the International Monetary Fund on Friday approved a 20-month Stand-By Arrangement for Sri Lanka in an amount equivalent to SDR 1.65 billion (about US$ 2.6 billion) to support the country’s economic reform program. An amount equivalent to SDR 206.7 million (about US$ 322.2 million) becomes immediately available to Sri Lanka the IMF said.

The remaining amount will be phased in, subject to quarterly reviews. The total amount of IMF resources made available under the arrangement equals 400 percent of the country’s quota.

The key objectives of the authorities’ economic reform program supported by the Fund are to strengthen the country’s fiscal position while ensuring the availability of resources for much needed post-conflict reconstruction and relief efforts.

The program is also intended to rebuild international reserves and strengthen Sri Lanka’s domestic financial system, and to protect the most vulnerable in the county from the burden of the needed economic adjustment.

The program aims at laying a strong macroeconomic foundation that will help the authorities approach the broader international community for financial support in post-conflict reconstruction.

Deputy Managing Director and Acting Chairman Takatoshi Kato said “The Government’s ambitious program, supported by the IMF, intends to restore fiscal and external viability and address the significant reconstruction needs of the conflict-affected areas, thereby laying the basis for future higher economic growth.

“Reducing the Central Government’s fiscal deficit, while preserving spending on health and education and protecting the most vulnerable in society from the economic downturn, is a central goal of the Government’s program.

To that end, the authorities have put in place revenue enhancing measures and intend to introduce reforms to reduce tax exemptions and broaden the tax base beginning in the 2010 budget.

This, together with savings on military spending and possible concessional donor financing, should help finance the considerable reconstruction spending needs.

“The program aims at rebuilding reserves to prudent levels while allowing the flexibility in the exchange rate necessary to boost the competitiveness of Sri Lanka’s exports. At the same time, the Central Bank’s policies will aim at controlling inflation while ensuring adequate credit to the private sector.”

“The Government had also moved quickly to address vulnerabilities in the banking system and implementing a plan to recapitalise the troubled Seylan Bank. The Government intends to develop a contingency plan to deal with potential stresses in the financial system and put in place measures to improve regulation and address financial sector supervisory gaps.Sri Lanka has been hit hard by the global economic and financial crisis. After years of reliance on short-term financing from international markets to cover its fiscal deficit, Sri Lanka experienced a sudden stop of international capital flows as the global crisis hit.

The Central Bank’s initial efforts to keep the exchange rate from depreciating led to a significant loss of reserves. Despite a rebound in short-term capital in flows following the end of the conflict, reserves remain low and foreign exchange needs remain acute.

The economic growth outlook has deteriorated with a growth of around 3 percent expected this year compared to 6 percent in 2008. The financial sector has also been put under increasing stress as the economic slowdown takes its toll.The end of the conflict further added policy challenges to the authorities. The reconstruction and humanitarian relief efforts are a large undertaking. Significant spending priorities need to be met while debt sustainability is maintained.

*********

Opposition’s wild propaganda dismissed

State Revenue and Finance Minister Ranjith Siyambalapitiya told the Sunday Observer that the International Monetary Fund (IMF) has already approved the US$ 2.6 billion loan to Sri Lanka jettisoning the Opposition’s wild propaganda that the IMF was delaying the grant of the loan due to Sri Lanka’s unsound financial management.

The IMF has already clearly stated that the delay if any, was mainly due to the world recession which has taken a heavy toll on global finance. The Minister while dismissing the Opposition’s other allegations, that the Government has pledged to cut down on welfare measures said the IMF in fact wants to strengthen social welfare by promoting the health and education sectors in the country.

*********