IMF Survey: Sri Lanka to Use IMF Loan to Reform Economy After Conflict

IMF News, July 29, 2009

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Canonical URL: IMF Survey: Sri Lanka to Use IMF Loan to Reform Economy After Conflict

IMF approved a 20-month Stand-By Arrangement for Sri Lanka providing the country with a $2.6 billion loan to help reform the economy following the end of its extended conflict.
The government’s program aims to:
- rebuild international reserves;
- reduce the fiscal deficit to a sustainable level of 5 percent of GDP by 2011;
- strengthen the financial sector;
- cushion the most vulnerable from the needed adjustment.
The program is intended to provide a framework for international donor support for reconstruction needs (infrastructure, roads, hospitals, schools).

Sri Lanka had been running high budget deficits for several years and had borrowed internationally on short terms.
The global financial crisis caused a sudden stop in financing from international markets.
The central bank intervened to prevent exchange rate depreciation, which put pressure on international currency reserves; reserves remain at very low levels.
The country is emerging from a 26-year conflict, with significant reconstruction needs.

The government intends to maintain protection for the poor and funding for social services.
Social sector spending is targeted to increase to 7 percent of GDP in 2009 from 6.8 percent in 2008.
The Samurdhi program is cited as a key poverty-alleviation instrument, and the government is taking action to provide immediate relief and expand social safety net spending to resettle displaced persons in the North.

The government requested a 20-month Stand-By Arrangement with access of SDR 1,653.6 million (about $2.6 billion), equivalent to 400 percent of Sri Lanka’s quota.
Disbursement schedule:
- Initial disbursement of SDR 206.7 million (about $322.1 million) is made upon approval;
- Followed by seven additional disbursements in an equivalent amount.
Interest rate: currently less than 1½ percent per year.
Disbursements will be subject to quarterly reviews; starting in September 2009, disbursements will depend on the completion of a review.
IMF funds would go directly into central bank reserves, rather than financing budget expenditures, to rebuild reserves while allowing exchange rate flexibility.

Rebuilding reserves is expected to:
- provide a shock absorber to the real economy and reduce the size of real-economy adjustment otherwise needed;
- help avoid a balance of payments crisis and allow a more gradual adjustment;
- preserve confidence and allow the country to sustain a higher level of growth over time.
The program is tailored to Sri Lanka’s unique circumstances; negotiations took time to ensure careful design.

Source: IMF Survey online, July 29, 2009.