IMF cautious on Sri Lanka's deficit, reserves

By Shihar Aneez

COLOMBO, Nov 9 - International Monetary Fund on Monday said Sri Lanka had shown commitment in meeting its targets for a $2.6 billion loan, but cautioned on risks over the island nation's high budget deficit and borrowed reserves.

The global lender approved $329.4 million, its second tranche of the $2.6 billion loan on Friday [ID:nWEN6270], which Sri Lankan central bank had said will boost the island nation's reserves to a record high of over $5 billion.

The IMF said the government has assured to bring down the budget deficit, which economists expect to be around 9 percent of gross domestic product, to 7 percent as agreed with the global lender.

"The government obviously recognises this is a difficult target to meet. We will just have to see what happens and that will be an issue for future reviews," Koshy Mathai, Sri Lanka's IMF resident representative told reporters in a teleconference.

"Sri Lanka still a country with a high debt stock, and having high debt stock is fundamentally not conducive to good economic management."

The government has not announced its budget balance for the current year.

The central bank estimates Sri Lanka's revenue in the January-August period to be at 409.2 billion rupees ($3.56 billion), a similar level compared to the same period a year earlier and equivalent to 47.8 percent of the 855 billion rupees forecast for all of 2009.

But expenditure for the same period had risen by a fifth to 766.8 billion rupees year on year, or 64 percent of the expected spending for 2009.

HOGH DEFICIT, BORROWED RESERVES

Mathai also said a major portion of the island nation's foreign currency reserves was from various foreign investments and not from export proceedings and remittances. "There is always a risk that money could go out if investors change their mind." he said.

Ajith Nivard Cabraal, the central bank governor, said a 7 percent budget deficit is still achievable this year.

"We are confident that the policies we are presently implementing are sufficient to deal all the vulnerabilities that could be envisaged by anyone," he told Reuters.

On Friday, the IMF approved the second tranche of the loan, after delaying it for almost one month due to Sri Lanka's decision to go for an interim budget in the first four months of 2010, on pending parliamentary poll due by April 2010.

The IMF said with the government will be working to limit spending pressures in the period ahead in its interim budget.

Sri Lanka, on Oct. 30, in a supplement to its letter of intent for the IMF loan has pledged to limit its spending in the first third of 2010. (Additional reporting by Ranga Sirilal; editing by Kazunori Takada)