Sri Lanka gets US$2.6bn from IMF on tight budget, rupee flexibility

July 25, 2009 (LBO) – The International Monetary Fund has approved a 2.6 billion US dollar loan to Sri Lanka with a 322 million dollar tranche being immediately disbursed on a program that is aiming to keep the budget deficit at 7.0 percent of the economy. The IMF said a combination of short term foreign borrowings to fill holes in the budget and central bank defence of a dollar peg had landed the country in a balance of payments crisis.

Trigger

“After years of reliance on short-term financing from international markets to cover its fiscal deficit, Sri Lanka experienced a sudden stop of international capital flows as the global crisis hit,” the IMF said.

“The central bank’s initial efforts to keep the exchange rate from depreciating led to a significant loss of reserves.”

The program aims to maintain economic growth at least at 3.0 percent of gross domestic product and build up the country’s depleted foreign reserves to 2.49 billion US dollars, with a flexible exchange rate.

“The program aims to rebuild reserves to prudent levels while allowing the flexibility in the exchange rate necessary to boost the competitiveness of Sri Lanka’s exports,” deputy managing director Takashita Kato said in a statement.

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