Sri Lanka drops ‘budget support’ loan with IMF

Feb 12, 2013 (LBO) – Sri Lanka has dropped plans for a new ‘budget support’ loan program with the International Monetary Fund, the island’s central bank said as the lender was not willing to give money directly for government spending. Injections into foreign reserves allows a central bank to run less tight monetary policy (sterilize less foreign exchange purchases) thereby creating space in the credit system which could be utilized by fiscal authorities at lower interest rates.

The IMF usually funds the central bank and other lenders such as its ‘Bretton Woods twin’ World Bank give direct budget support, though in the case of Europe, fiscal support has been given.

The Central Bank said the Fund has conveyed that it may “not be in a position to consider any direct or indirect budget support to Sri Lanka,” since Sri Lanka did not need any exceptional financial support from the IMF.

The Central Bank said since foreign reserves were now about 7 billion US dollars, from the 1 billion dollar level in 2009 when the country started a 2.5 billion US dollar bailout from the IMF the central bank also did not need reserves.

But other analysts have pointed out that Sri Lanka has to start repaying the IMF loan from this year and