International Monetary Fund approves $1.5 billion loan to Sri Lanka

The Executive Board of the IMF approved a 36-month extended arrangement under its Extended Fund Facility

The International Monetary Fund has approved a $1.5 billion loan to Sri Lanka, with $168 million being disbursed as the first tranche with immediate effect to support the country's economy, which is showing "signs of strain".

The Executive Board of the IMF on Friday approved a 36-month extended arrangement under its Extended Fund Facility (EFF) with Sri Lanka for an amount equivalent to 1.1 billion special drawing rights (about $1.5 billion).

"The IMF 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," it said in a statement.

The approval enables an immediate disbursement of about $168.1 million while the remainder will be available in six instalments subject to quarterly reviews.

The IMF is also expected to catalyse an additional $650 million in other multilateral and bilateral loans, bringing total support to about $2.2 billion (over and above existing financing arrangements), it said.

The IMF programme aims to raise revenue through new taxes, to finance the additional budget spending.

"Despite positive growth momentum, Sri Lanka's economy is beginning to show signs of strain from an increasingly difficult external environment and challenging policy adjustments," Min Zhu, Deputy Managing Director and Acting Chair, said in a statement.

"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," he said.

Sri Lanka's foreign reserves dropped through 2015 as the central bank spent 200 billion rupees to defend the falling Rupee. The rupee nosedived from 131 to 147 against the dollar over the past year.

"The overall balance of payments deteriorated significantly in 2015 despite an improvement in the terms of trade," the IMF noted.

"A clear commitment to exchange rate flexibility will enable adjustment to a shifting external environment while allowing the central bank to rebuild foreign exchange reserves and focus more closely on its key mandate of price stability," Min said.

With the IMF programme, Sri Lanka is shortly expected to go to international markets for a $1.5 billion loan.

The release said the approval of the facility was IMF's endorsement of the Maithripala Sirisena government's economic reform agenda over the medium term.