IMF to discuss Sri Lanka loan follow-up

• Central bank seeking follow up to $2.6 bln loan
• IMF withholding 8th tranche of loan
• FX flexibility at issue

By Shihar Aneez

COLOMBO (Reuters): The International Monetary Fund said on Thursday it is ready to discuss any Sri Lankan request for a follow up programme to its current $2.6 billion loan programme, which is now on hold due to the island nation’s failure to implement currency flexibility.

The IMF has withheld the eighth tranche of the loan since September after the central bank failed to meet the global lender’s repeated request to allow rupee flexibility.

However, the central bank on Tuesday said Sri Lanka would seek a follow up or surveillance programme for its $59 billion economy after the current loan facility, which is scheduled to be completed by the end of 2012.

“We are always available and willing to discuss the issue with the government,” Sri Lanka’s IMF Country Representative Koshy Mathai told Reuters, referring to the follow up programme.

Central Bank Governor Ajith Nivard Cabraal on Tuesday told Reuters the follow up programme will help IMF to monitor the economic performance of Sri Lanka, which will start repaying the Fund’s loan from 2014 onwards.

Mathai declined comment when asked if Sri Lanka has done enough to receive the eighth tranche after a 3 per cent devaluation in November, saying: “(A) mission is coming to discuss issues this month.”

In July, Central Bank Governor Ajith Nivard Cabraal said Sri Lanka was capable of managing on its own when asked if Sri Lanka would go for another IMF programme to maintain investor confidence.

However, it was not clear whether the central bank could negotiate the follow up programme without completing the current deal while currency flexibility still remains an issue.

The central bank still defends the rupee at 113.90 per dollar and has spent more than $780 million to keep the exchange rate steady since a 3 per cent devaluation on Nov. 21. It spent a net $1.36 billion in the first nine months of 2011 to keep depreciation pressure at bay.

The IMF, which has already disbursed $1.8 billion of the $2.6 billion, said during its last mission in September that Sri Lanka’s non-borrowed reserves have steadily declined and it should limit intervention in foreign exchange.

Sri Lankan President Mahinda Rajapaksa, in his capacity as finance minister, devalued the rupee by 3 per cent on Nov. 21 seeking to make exports more competitive after the central bank defended the rupee heavily.

The IMF welcomed the devaluation as a “step in the right direction.”

Treasury Secretary P.B. Jayasundera appeared to contradict the central bank’s stance last week, saying Sri Lanka needs flexible exchange rates as well as tighter monetary policy to discourage importers from using too much credit to buy imported goods.

Sri Lanka’s reserves fell around 27 per cent in the last five months of 2011 due to the central bank’s rupee defence and the country is expected to have recorded a balance of payment deficit last year.