Sri Lanka eyes new deal with IMF as bailout draws to a close

June 16, 2012 (LBO) – Sri Lanka is eyeing a new deal with the International Monetary Fund with the end of three year program in July 2012 whose success was marred at its tail end by a new balance of payments crisis triggered by energy price manipulations. The three year 2.5 billion US dollar program restored confidence of international lenders, allowing the country to access foreign capital, boost growth to 8.0 percent and reduce inflation to low single digits for almost three years.

In 2012 growth is expected to fall to a still respectable 6.75 percent. But causing real harm to the people, inflation is expected to rise to 9.5 percent, according to IMF projections, on top of steep currency devaluation.

It is not known what the outcome would have been without an IMF program where foreign lenders perhaps pulled out of bond markets, adding capital flight to a ‘current account’ problem of contradictory monetary and exchange rate policies.

Sterilized Stimulus

The balance of payments crisis was initially triggered by a spike in credit taken by state energy enterprises to manipulate tariffs.

The central bank failed to allow interest rates to move up in time to save Sri Lanka’s currency peg and instead sterilized two billion doll