IMF Board approves USD 2.6 billion loan for Sri Lanka


The Executive Board of the IMF has approved the fund of which the first installment of USD 322.2 million will be made available immediately. The remaining amount will be phased in, subject to quarterly reviews.

This is the first major financial aid to Sri Lanka after the end of the more than three-decade-old civil war in the island's north which resulted in the defeat of LTTE rebels.

Key objectives of Colombo's economic reform programme 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 IMF said in a press release.

The programme is intended to rebuild international reserves and strengthen Sri Lanka's domestic financial system. It also aims to lay a strong macroeconomic foundation that will help the authorities approach the broader international community for support in post-conflict reconstruction.

Following the Executive Board discussion on Sri Lanka, Takatoshi Kato, Deputy Managing Director and Acting Chairman, said the global financial crisis has had a significant impact on Sri Lanka's economy.

Kato said that persistently high budget deficits forced the island government to rely on short-term financing from international markets.

"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," he said.

"Reducing the central government 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 programme," he said.

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, Kato said.

"The program aims to rebuild 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 to control inflation while ensuring adequate credit to the private sector," he added.

Suggesting to take difficult reform measures, Kato said the island government should take advantage of the opportunity created by the end of the conflict "to ensure national reconciliation, restore macroeconomic stability and promote strong and durable growth".

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