Sri Lanka passes IMF loan hurdle, despite failing fiscal target

Nov 07, 2009 (LBO) – The International Monetary Fund (IMF) has approved a 413.4 million US dollar tranche under its stand by loan, despite the government failing to meet a key budget constraint, the lender said. Under the original deal, a net international reserve target, which excluded borrowed reserves other than that of the IMF itself, was set at 1,411 million US dollars.

IMF documents showed that the target was revised upward by 1.6 billion US dollars to 3,105 million US dollars as foreign investments flowed into the Treasuries market due to high local interest rates and US monetary loosening.

But the revised estimate of foreign reserves by the end of October had reached 3,555 million US dollars.

Sri Lanka’s total foreign reserves are now nearing 5.0 billion US dollars, the Central Bank governor Nivard Cabraal said before the 413 million US dollar IMF tranche was released.

The Central Bank has kept inflation at low levels allowing monetary policy to be looser.

Sri Lanka, which runs a peg with the US dollar, has ‘imported’ loose US monetary policy with hundreds of millions of dollars flooding into treasuries markets, with substantially higher policy rates kept by a cautious monetary