Sri Lanka central bank clarifies IMF interest rates

Jan 31, 2012 (LBO) – Sri Lanka’s central bank said it would only have to pay a higher interest rate for International Monetary Fund loans exceeding 300 percent of the country quota, and lower balances would only attract a rate of a little over 1.0 percent. The IMF has effectively suspended its 2.6 billion US dollars bailout program for Sri Lanka after the central bank started defending the currency July 2011 and started to print money aggressively (sterilized intervention) to keep interest rates down.

Sterilized intervention triggers a vicious cycle of dollar sales and liquidity injections resulting in a rapid loss of forex reserves which is typically called a ‘balance of payments crisis’.

The lender is holding back the final two tranches of 800 million US dollars pending a float of the currency.

Media reports quoted Central Bank Governor Nivard Cabraal as saying that Sri Lanka would have to pay as much as 3.1 percent for the full loan if all the money was drawn down and the island would not be taking the balance money.

The Central Bank said up to 300 percent of country quota, the IMF charged 1.0 percent margin and its special drawing rights (SDR) interest rates. SDR is a composite ‘IMF currency’ based on a basket of freely floating rat