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Emerging Markets

Sri Lanka to use IMF loan for reserves boost

Sri Lanka will spend all of the first tranche of its new IMF loan – between $800 million and $1 billion – replenishing foreign exchange reserves, the country’s governor at the Fund has revealed

Sri Lanka will spend all of the first tranche of its new IMF loan – between $800 million and $1 billion – replenishing foreign exchange reserves, the country’s governor at the Fund has revealed.

Sarath Amunugama, investment promotion minister and top official at the IMF, said the first tranche of the loan would be parked at the central bank, “to stabilize the currency, which will also then help the government service its external debt”.

Reserves at Sri Lanka’s central bank are now dangerously low and cover only six weeks of imports. This is against a background of swollen capital outflows, weak foreign direct investment and slowing textile and agricultural exports.

A $1.9 billion, two-tranche stand-by agreement for the current fiscal year will be submitted for the approval of the IMF board in the next two weeks. The second portion will most likely be disbursed six months after the first, Amunugama told Emerging Markets in an interview in Bali this weekend.

Fears the aid would have be used for political purposes – by funding the resettlement of civilians displaced in the government’s conflict with the Tamil separatists in the north and east of the country – had reportedly delayed the $1.9 billion loan.

Sri Lanka has been locked in a violent 20-year battle with the Liberation Tigers of Tamil Eelam (LTTE), who urge a separate state for the ethnic Tamil minority in north-east Sri Lanka. Over the past year, the military conflict has intensified amid a torrent of international condemnation on the civilian casualties. The UN says 6,500 civilians may have been killed, 14,000 wounded and 110,000 displaced so far this year.

Against this backdrop, Amunugama said “the IMF should not be and cannot be the place to impose the political views of a country”. He denied suggestions that the US and Britain have influenced the structure of the loan with its current bias towards monetary rather than fiscal support.

It is not yet known whether the second tranche will be used to further bolster foreign exchange reserves, address the government’s balance of payment needs or directly to finance public spending.

Amunugama also said the IMF had not imposed public expenditure cuts that would reduce development spending as a condition for the loan. A budget deficit target of 7% for 2009 has been pencilled into the country’s stand-by agreement with the IMF.

Amunugama said that the IMF, under the stewardship of managing director Dominique-Strauss Kahn, “now recognizes that social safety nets need to be maintained” – a change in the Fund’s reputation of enforcing fiscal austerity at the expense of economic development.

The Sri Lankan army said at the end of last week that it would launch a final assault on the Tamil insurgency in the north of the country. The British and French foreign ministers visited Sri Lanka last week to pressurize the government to negotiate a ceasefire and ensure aid agency access to the thousands of civilians trapped in the fighting.

But Amunugama argued a military solution to the conflict was in sight. “The war in the north is rapidly coming to a conclusion and the number of civilians held by the LTTE is now rapidly dwindling”, he said.

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