April 5, 2009 (AFP) – Sri Lanka appears to be on the verge of crushing Tamil Tiger rebels after decades of fighting but its success has blown a hole in the nation’s finances and forced it to seek an IMF bailout. Negotiations are underway with the International Monetary Fund for a 2.4 billion-dollar rescue package as the island’s economy reels from the twin effects of unprecedented war spending and the global financial crisis.
Sri Lanka has turned to the IMF after earmarking 1.6 billion dollars this year to financing the military drive against the Tiger rebels that the government says it is close to winning.
This comes on top of three billion dollars spent in the previous two years.
President Mahinda Rajapakse has vowed to get the IMF money on his terms and not “pawn or sell our motherland to obtain any monetary aid”.
But a source close to the negotiations said Sri Lanka would have to make “painful adjustments”.
“This means allowing the rupee to depreciate, cutting subsidies and a freeze on state sector jobs,” the source said. Economists say the country may also be forced to raise interest rates after cutting them to spur a slowing economy.
Economists say the money worries