Sri Lanka Drops Fresh IMF Loan Over Spending Dispute

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By Jerin Mathew | February 12, 2013 6:17 PM EST

Sri Lanka drops plan to take extra loan from IMF

Sri Lanka has decided not to pursue a new loan from the International Monetary Fund as the agency was not willing to accept the conditions put forward by the government regarding the spending of aid funds. 

The country was in talks with IMF for an extended fund facility in order to support its development activities as the island nation has made significant progress in balancing its finances.

The central bank said the IMF had indicated that it may not be in a position to consider any direct or indirect budget support to Sri Lanka, since the current improved status of Sri Lanka does not warrant unconventional and exceptional financial support.

IMF added that Sri Lanka had developed access to international capital markets and could access budget support from such sources, if necessary.

"Sri Lankan authorities have decided not to pursue a new programme with the IMF, but to continue maintaining the close relationship with the Fund under standard consultation processes similar to many other member countries," the bank said in a statement.

The central bank noted that the country's external reserves have increased to about $7bn (£4.5bn, €5.2bn) at present from just over $1bn in early 2009, when it commenced a stand-by arrangement with IMF. Therefore, the country is in a very limited need to increase foreign reserves through traditional IMF balance of payment support programmes, the bank said.

"In that background, the Sri Lankan authorities had expressed their interest in a future IMF programme, only if such programme entailed support to finance the budget within the announced fiscal consolidation process by which the Government has already committed to bring down the fiscal deficit to 5.8 percent of GDP in 2013 and below 5 percent of GDP in the medium term."

In 2009, the IMF granted a $2.6bn loan to Sri Lanka, which helped the country to keep its inflation rate in the single digits, bolster foreign reserves to a record high and reduce the fiscal deficit and debt-to-GDP ratio to appropriate levels.

The central bank also kept its reverse repurchase rate at 9.5 percent and the repurchase rate at 7.5 percent, according to a separate statement.

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