Sri Lanka to receive $415 million IMF loan

The International Monetary Fund’s board of directors agreed to disburse about $415 million to Sri Lanka, the final tranche of a $2.6 billion loan.

The Washington-based IMF also recommended new financial support for the South Asian island as global demand slows, it said in an e-mailed statement.

“It will be important to continue macroeconomic stabilization and structural reforms efforts, in particular maintaining exchange rate flexibility while building international reserves, given the uncertain global outlook,” IMF Deputy Managing Director Naoyuki Shinohara said. “A successor arrangement with the Fund would provide valuable support to the authorities in these endeavors.”

High external vulnerability

Sri Lanka has let its rupee weaken to a record, raised interest rates and boosted energy prices to narrow its trade deficit and protect foreign-exchange reserves. President Mahinda Rajapaksa is raising cash to build roads, ports and power plants to help boost growth after the $59 billion economy expanded in the first quarter at the slowest pace in two years.

“The government’s policy package to contain the trade deficit is working, which together with continued strong remittances and tourist related inflows is helping to turn around the balance of payments position,” Prakriti Sofat, a regional economist at Barclays Plc in Singapore, said before the IMF announcement. “Although external vulnerability remains high, we believe continued IMF involvement will support investor confidence.”

Shinohara said that the current monetary policy is appropriate and recommended that monetary conditions “remain firm” in the near term. Authorities’ foreign exchange market intervention should be “limited to smoothing excessive volatility,” he said.

© Bloomberg