Typical street scene in Santa Ana, El Salvador. (Photo: iStock)

Typical street scene in Santa Ana, El Salvador. (Photo: iStock)

IMF Survey: IMF Loan Helps Sri Lankan Reconstruction Drive

November 6, 2009

  • IMF-supported program aims to build confidence in economy, protect the vulnerable
  • Government reaffirms policy of addressing humanitarian needs of those displaced by conflict
  • Sri Lankan economy shows tentative signs of recovery

A loan from the IMF is helping rebuild confidence in Sri Lanka’s economy as it recovers from conflict and paves the way for donor assistance in its reconstruction effort.

IMF Loan Helps Sri Lankan Reconstruction Drive

Workers build a road in east Sri Lanka. Reconstruction efforts have begun to take shape across the island (Photo: Newscom)

Post-conflict countries

The IMF Executive Board met on November 6 and cleared the way for the release of just over $322 million. The Board reviewed the Sri Lankan government’s progress on the implementation of reforms agreed to last July, and the November 6th decision means the second installment of the country’s loan can proceed.

In July, the IMF approved a 20-month Stand-By Arrangement for Sri Lanka providing the South Asian island nation with a $2.6 billion loan to help overcome the effects of the global financial crisis and support the economy following the end of its extended conflict. The Sri Lankan monetary authorities received over $322 million as the first installment of the loan.

“The financing from the IMF has helped avert a sharp economic slowdown that would have hurt all the people of Sri Lanka, but particularly the most vulnerable, and compounded the suffering caused by the war,” said Brian Aitken, head of the IMF’s mission to Sri Lanka.

Reconstruction and resettlement efforts

In their most recent communications with the IMF on the program, the Sri Lankan authorities have reiterated their commitment to rapidly address humanitarian issues. The government recognizes the need to move forward quickly to resettle those displaced by the conflict and begin the reconstruction effort, and is drawing on budget resources for the provision of humanitarian assistance and resettlement. Their goal is to resettle 70–80 percent of the people displaced by the conflict by the end of this year and complete the resettlement in the first part of 2010. IMF Managing Director, Mr. Dominique Strauss-Kahn, has recently emphasized the importance the IMF attaches to improving the humanitarian situation in Sri Lanka in an exchange of letters with Human Rights Watch.

The program will guide the government as it takes the steps necessary for the country to return to economic health in the months ahead. “One of the main purposes of the program is to rebuild confidence in the economy, and thereby lay the basis for higher growth in the years ahead. This would provide more resources to the government so they can engage in their important reconstruction efforts and sustain social spending to protect the poor,” said Aitken.

The reconstruction efforts in the Northern province are being led by a recently appointed Presidential task force. In addition to resettlement of the internally displaced persons, the task force is also in charge of planning and monitoring reconstruction of the social and economic infrastructure. The strategy includes rebuilding basic infrastructure, revitalization of productive sectors, and human settlement development.

The Northern province is home to about one million people and is the poorest region in the country, accounting for about 3 percent of the nation’s output.

One key source of financing for these reconstruction and resettlement efforts is through a restructuring of government expenditures. The government intends to reduce defense spending over 2010–11 by a considerable amount, and has also begun redeploying military resources toward the reconstruction efforts in the North, such as de-mining, basic infrastructure, and other activities central to resettlement. “The IMF recognizes that the people of Sri Lanka—and especially those who are most vulnerable—cannot be held responsible for the current economic difficulties faced by the country, so our role is to do everything possible to prevent any worsening of the economic situation, the effects of which would be disastrous for the poorest parts of the population,” said Aitken.

The program also provides a framework for a more stable economic environment in which international donors will be able to come in and help support the government’s considerable reconstruction needs over the next several years, including repairing and rebuilding infrastructure, roads, hospitals, and schools.

Positive economic signs

Recent economic developments in Sri Lanka have been stronger than expected, with the decline in output growth showing some early signs of bottoming out. The economic outlook has been buoyed as exports have recently shown signs of a recovery, with import growth remaining subdued. Higher-than-expected remittances since May and the pickup in economic activity are the main drivers in a possible rebound in the months ahead.

A sharp increase in investor interest has led to significant capital inflows, and there are also signs that credit demand is now picking up. Nevertheless, some fundamental policy weaknesses remain, with persistently high budget deficits and external imbalances still needing to be addressed.

Looking ahead

With the country scheduled to hold elections next year, the Sri Lankan government will be working to limit spending pressures in the period ahead. Some of the planned fiscal reforms, such as measures to broaden the tax base, will also be delayed until after the elections take place. “We believe that the government will still be able to carry out its commitment to submit a full-year budget consistent with the program targets which includes tax reform measures once the new parliament is in place,” said Aitken.

The country’s program of economic reforms will aim to further rebuild reserves, protect social spending while reducing the fiscal deficit, and strengthen the financial sector, the IMF says.