Sri Lanka secures $1.5 Billion IMF loan to help bolster finances

Sri Lanka reached an agreement with the International Monetary Fund for $1.5 billion in loans to help lower its borrowing costs and bolster finances.

The South Asian nation has pledged to narrow its fiscal deficit to 3.5 percent of gross domestic product by 2020 through “a comprehensive set of reforms to Sri Lanka’s tax system,” the Washington-based lender said in a statement. The loan program will need approval by the IMF’s executive board, which is due to consider it in early June.

Once approved, it’s “expected to catalyze an additional $650 million in other multilateral and bilateral loans, bringing total support to about $2.2 billion, over and above existing financing arrangements,” the IMF said.

Sri Lanka was looking for a loan of as much as $1.5 billion from the IMF as a seal of approval for the government’s policies in order to help draw further foreign inflows, central bank Governor Arjuna Mahendran said in an interview last month.

The government is seeking to sell as much as $3 billion of bonds in international markets this year after refinancing concerns prompted Fitch Ratings to downgrade the nation and Standard & Poor’s to cut its rating outlook to negative.

The rupee is trading near a record low after worsening foreign-exchange reserves and balance of payments forced the central bank to stop propping up the currency. 

“The government is committed to dealing quickly with the legacy of Sri Lankan Airlines, which continues to represent a drain on public finances after years of mismanagement,” the IMF said. Going forward, key state firms will be governed transparently by annually published statements of corporate plans, it said.

Sri Lanka has pledged to ensure that the pricing of electricity and fuels is guided by the market, with subsidies needed to protect the poor being better targeted and clearly reflected on the government’s budget, according to the IMF.

“The central bank will shift toward a flexible inflation targeting regime while also undertaking measures to help deepen foreign exchange markets and support a durable transition to a flexible exchange rate regime,” according to the statement.

Sri Lanka last sought an IMF loan in 2009 following the end of a three-decade old civil war and under the leadership of Mahinda Rajapaksa, to bolster its international reserves. It received the final tranche of the $2.6 billion IMF loan in 2012, Bloomberg reports.

-Agencies