The International Monetary Fund’s (IMF) executive board has approved a three-year $1.5 billion loan to support Sri Lanka’s economic reform agenda which is hit by a balance-of-payments crisis, the global lender said on Saturday.
The main objectives of the programme are reforms aimed at boosting government revenues to reduce the fiscal deficit, improving foreign exchange reserves, reducing public debt and Sri Lanka’s risk of debt distress, and improving public financial management.
The loan also aims to improve the operation of state-owned enterprises and to help a transition towards inflation targeting with a flexible exchange rate regime.
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“The arrangement aims to meet balance of payments needs arising from a deteriorating external environment and pressures that may persist until macroeconomic policies can be adjusted,” the IMF said in a statement.
IMF deputy managing director and acting chair Zhu Min said that, despite positive growth momentum, Sri Lanka’s economy was beginning to show signs of strain from an increasingly difficult external environment.
“The new government’s economic agenda, supported by the extended fund facility, provides an important opportunity to re-set macroeconomic policies, address key vulnerabilities, boost reserves, and support stability and resilience,” Zhu said in a statement.
Reducing the overall fiscal deficit to 3.5 percent of gross domestic product (GDP) by 2020, from last year’s 7.4 percent, “is the linchpin of the reform program”, Zhu said.
The decision will enable an immediate disbursement of $168.1 million and the remainder will be available in six installments, subject to quarterly reviews. It is also expected to encourage an additional $650 million in other multilateral and bilateral loans, bringing the total level of support to about $2.2 billion, the IMF said.
The $82.2 billion Sri Lankan economy’s foreign exchange reserves have fallen by more than a third from their peak in late 2014 to $6.1 billion at the end of April, mainly due to foreign outflows of around $2 billion from government securities.
“There is a strong emphasis on reforms. The loan will give Sri Lanka breathing space to implement reforms, while boosting investor confidence. Politically it will be a challenge to the government,” Anushka Wijesinghe, chief economist of Sri Lanka’s main business chamber, told Reuters.
The government has to repay more than $5.5 billion in foreign loans through to the end of April, 2017, according to the latest data.