Sri Lanka IMF bailout loan resumed; US$426mn loaned for reserves

Apr 03, 2012 (LBO) – The International Monetary Fund said it will give 426 million US dollars to Sri Lanka, resuming its suspended bailout loan, after authorities took corrective steps to stem credit and foreign reserve losses. Settling external loans with foreign reserves does not add new demand but can prevent a contraction of demand (and imports) that would have naturally occurred if taxes or money raised via Treasury sales were used to settle foreign loans.

Sri Lanka’s foreign reserves have slipped until mid March, analysts who study the Central Bank closely say, after falling 39 percent to 5.8 billion US dollars in January 2012 from a peak of 8.1 billion in July 2011.

In the current balance of payments crisis, the rupee fell from 109 to 131 and has since recovered to around 128.00

Analysts have warned that the rupee will remain vulnerable until the Central Bank ends all sterilized sales of foreign exchange.

Energy Manipulation

State credit rose largely due loss making state enterprises, with state energy enterprises in particular using credit to intervene and manipulate oil prices.

In February the Central Bank raised interest rates, allowed the exchange rate to fall as sterilization