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Thu, 24 April 2014 12:46:16
Sri Lanka IMF loan tranche held back on runaway budget
25 Feb, 2010 15:33:03
Feb 25, 2010 (LBO) - The International Monetary Fund (IMF) has held back the third tranche of a 2.6 billion US dollar loan to Sri Lanka after the country's budget went off track in the last quarter of 2009.
The tranche of slightly over 300 million US dollars was expected in March after following the completion of a review by an IMF mission in February.

An IMF mission chief Brian Aitken said the lender was unable to 'complete' its review at this time.

In limbo

When a mission fails to 'complete' a review an IMF program effectively stays suspended. The program eventually ends if a subsequent review does not take place. Sri Lanka's last two IMF programs ended with missions that were unable 'complete reviews'.

"Government has expressed their strong desire to bring the program back on track," Aitken he told reporters.

"The review will be completed only after May. It made sense for us to re-engage in comprehensive talks after the formation of the new cabinet following the election."

A new IMF mission is expected to come back, after parliamentary polls on April 08 though a specific date has not yet been set.

Sri Lanka's central bank has met reserve money (the narrowest money supply that is used to clear final transactions in the economy) and foreign reserves for December, which are two key targets underpinning the deal with the IMF.

Overshoot

But in December the Treasury has missed the third target or performance criterion defined as a limit on domestic borrowing, by a "substantial amount", the IMF mission said.

The overall budget deficit for 2009 was planned at 7.0 percent of gross domestic product. Aitken said the IMF expected the target to be overshot "by about 1.5 to 1.75 percent of GDP.

IMF said initial information from Sri Lanka authorities indicated that a part of the overshoot came from faster than expected completion of capital expenditure, higher interest payments and unspecified other expenditure.

Atiken said the program had met the initial goal of rescuing Sri Lanka from a balance of payments crisis.

"When we approved the payments the country was facing a balance of payments crisis," he said. "The first goal of the program to bring the country away from the crisis has been accomplished."

"Delaying the tranche has no material effect on the economy."

Reserve Cover

He said Sri Lanka has built up five billion US dollars in foreign reserves though some of it was 'borrowed reserves' there was large enough buffer to pay any investor who wanted to take money out.

Sri Lanka's foreign reserves fell close to a billion dollars in May 2009 at the height of the balance of payments crisis.

"Now the issues are over time addressing the underlying issues," Aitken said.

"The budget, borrowings."

Sri Lanka's runaway budgets, which are then financed with central bank credit has been the key cause of high inflation, economic instability and balance of payments pressure and currency depreciation in the past.

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