Fin24

IMF: Sri Lanka seeking fresh bailout

2012-06-15 16:14

Colombo -Sri Lanka is seeking fresh help from the International Monetary Fund after drawing down a previous $2.6bn bailout, a top IMF official said Friday.

John Nelmes, head of an IMF mission to the Indian Ocean country, said Colombo wanted more assistance as it emerges from a decades-long civil war, but declined to say how much was being sought.

"We have initiated a discussion of a program to help Sri Lanka get deeper into a middle-income level country," Nelmes told reporters after an 11-day visit for talks with Sri Lankan officials.

Nelmes and his team were visiting the island ahead of releasing the final installment of $400m of the $2.6bn package.

He did not give a firm date for the Washington-based lender to release the installment, but official sources said it was a mere formality that would be completed in the coming days.

Finance ministry sources indicated that the government wanted at least another $500m from the IMF to support its foreign currency reserves which have dwindled due to a record trade deficit of $10bn last year.

Nelmes said drastic action was needed to raise revenues. Depreciating the local currency earlier this year had helped improve the balance of payments position, but he warned that inflation was rising.

"The authorities are successfully implementing a bold package of policy measures to curb the current account deficit and safeguard reserves, and these measures are yielding fruit," Nelmes said.

Sri Lanka sought to overcome its balance of payments troubles, triggered by a surge in domestic demand following the end of the country's 37-year ethnic war in 2009, with several new measures.

It has hiked interest rates, allowed its currency to fall nearly 15% this year against the dollar and imposed new taxes to curb imports.

The IMF said Friday that they expected Sri Lanka's 2012 growth rate to be a slower 6.75%, less optimistic than the Central Bank of Sri Lanka projection of 7.2%.

The original $2.6bn IMF bailout was announced in 2009 just after Sri Lanka had crushed Tamil separatist rebels and the island's foreign reserves had dropped to a dangerously low level of $1bn.

The IMF has warned Sri Lanka against commercial borrowings to finance the trade deficit as it could push the country into a vicious debt cycle. The government has insisted, however, that it does not risk a sovereign default.