IMF loan will build confidence in the economy and improve reserves

by a Special Business Correspondent

The IMF credit facility will build confidence in the economy, improve the reserve position of the country that declined to an alarming level, build investor confidence, stabilize the rupee and bring down the interest rates, economic analysts said.

The government requested a US$ 1.9 billion standby credit facility in March this year. However, it was delayed due to political reasons.

Last week IMF Managing Director Dominique Strauss-Kahn said that an IMF staff mission reached agreement with the Sri Lankan authorities on an economic program that could be supported by a 20-month Stand-By Arrangement for an amount equivalent to SDR 1.65 billion (about US$2.5 billion).

The program was expected to be considered by the Executive Board on July 24. The approval by the Executive Board would enable Sri Lanka to draw an amount equivalent to SDR 206.7 million (about US$313 million) immediately.

Government sources said that the first tranche of the loan would be received this week.

The analysts said that this loan facility would ease the burden of the government which relies on high cost short-term private debts. The high budget deficit has forced the government to go for credit. However, due to the global financial crisis the government has limited options and the private short-term credit is costly.

IMF has looked into several factors in approving this credit facility. According to Strauss-Kahn the global financial shock resulted in a sudden stop in financing and the capital outflow caused a significant loss of Sri Lanka’s international reserves. Despite recent capital inflows, country’s international reserves remain at low levels.

“The end of the conflict provides Sri Lanka with a unique opportunity to undertake economic reform and reconstruction, which would be the key to laying the basis for higher economic growth in the years ahead. To this end, the government has formulated an ambitious program aimed at restoring fiscal and external viability and addressing the significant reconstruction needs of the conflict-affected areas. The IMF staff supports this program, specifically the government’s goals of rebuilding reserves, reducing the fiscal deficit to a sustainable level, and strengthening the financial sector. It is also essential that the program cushion the most vulnerable from the needed adjustment.

“The reconstruction effort will be a large undertaking, with significant spending needs. The government’s program aims to meet these needs while safeguarding debt sustainability by boosting revenue and reducing spending in other areas. This program will also provide a framework for international donors to assist the government in financing its reconstruction effort.

“The strong measures that the authorities are taking under the program justify the exceptional level of access to Fund resources-equivalent to 400 percent of Sri Lanka’ quota in the IMF.

I would like to call upon the Sri Lankan authorities to work with the donor community to ensure an adequate level of financing for the reconstruction effort to lay the foundation for future growth,” Strauss-Kahn said in his statement.

Meanwhile the opposition charged that the government has agreed to various conditions that harm the country’s economy and demands to publish the Letter of Intent (LOI) and the article 14 that evaluates the financial standing of the country.

However, the government denied this and the Media Minister Lakshman Yapa Abewardena said that if the Opposition want, the government will give a parliamentary debate.