Download IMF Approves USD 2.6 billion Stand-By

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Press Release
Issued By
Date
Economic Research Department
27-07-2009
IMF Approves USD 2.6 billion Stand-By Arrangement Facility for Sri Lanka
The Executive Board of the International Monetary Fund (IMF) on 24 July 2009
approved a 20-month Stand-By Arrangement (SBA) facility of SDR 1.65 billion
(approximately USD 2.6 billion), to Sri Lanka as a Balance of Payment (BOP) support.
This accounts for 400 per cent of the country’s current quota with the Fund and is the
highest ever facility offered by the IMF to Sri Lanka. Immediately on approval of the
facility, the first tranche amounting SDR 206.7 million (approximately USD 322 million)
was made available to Sri Lanka, and this is the single largest disbursement the country
had thus far received from the IMF. The remaining amount will be disbursed in seven
tranches subject to the quarterly reviews on economic performance of the country.
Despite the unprecedented increase in fuel and commodity prices, particularly during
the first half of the year, economic fundamentals of Sri Lanka had been improving
steadily until the third quarter of 2008. However, by end 2008, the BOP turned into a
deficit and external official reserves dropped significantly as a result of several adverse
factors, such as, the sudden withdrawal of investment in Treasury Bills and Bonds by
foreign investors, the hasty claims on short term credit facilities that were quite freely
available for petroleum imports, the acute drying-up of commercial financing required
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for counterpart funds for the implementation of foreign funded projects under the
public investment programme and severe valuation losses arising from the sharp
depreciation of major international currencies against US dollar. Such factors have
exerted an unforeseen and unfavorable pressure on the country’s BOP and led to a
substantial decline in external reserves.
In that context, in March 2009, Sri Lanka sought a SBA facility with exceptional access
from the IMF amounting to USD 1.9 billion, 300 percent of country’s current quota. In
response to the request, a team of IMF officials visited Sri Lanka in late March to assess
the impact of the global financial crisis on Sri Lanka and to consider as to whether Sri
Lanka was in need of such assistance. The IMF officials had several key meetings with
various government and non-government organizations to obtain first hand
information. Further, the Sri Lankan delegation to the IMF Spring Meetings held several
rounds of discussions with senior staff of the IMF. A Safeguards Assessment mission
from the IMF also visited Sri Lanka to evaluate the reliability of information, procedures
and processes of internal controls and concluded that the Central Bank of Sri Lanka
employs a relatively strong framework of safeguards. However, despite the successful
completion of all technical level negotiations and the finalization of the content of the
Letter of Intent in April 2009, there was a delay in taking the SBA facility for discussion
by the Executive Board of the IMF.
In the ensuing period, the Central Bank of Sri Lanka was able to build up official
reserves by about US dollars 500 million on a net basis after supplying foreign
exchange to meet all government debt service obligations as well. Further, inflation
was brought down to below one per cent by end June 2009 from 28 per cent in June
2008.
With the ending of the decades long conflict with the LTTE in May 2009, a staff mission
from the IMF arrived once again in Sri Lanka in early July, to understand the new
environment and update the Program accordingly. Upon completion of the mission
negotiations, the IMF indicated that the SBA facility would be taken for discussion by
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the Executive Board on 24 July 2009 and accordingly, the LOI was signed by the Sri
Lankan authorities on 16 July 2009, with the key objectives under the SBA Program
being to rebuild external reserves further, while strengthening the country’s fiscal
position and the domestic financial system.
The approval of the SBA facility on 24 July 2009 is an endorsement of country’s
economic policies by the IMF as all macroeconomic policies and targets under the 20month Program are in line with policies already implemented and announced by the
authorities. The Government budget deficit for 2009 is expected to be 7 per cent of
GDP under the Program. The fiscal consolidation path accommodates expenditure for
relief, rehabilitation and reconstruction of the conflict affected areas while protecting
social expenditure such as expenditure for health, education and Samurdi payments. It
is also strongly believed that the endorsement of the Sri Lankan authorities’ policies by
the IMF would boost investor confidence in Sri Lanka and enhance the country’s ability
to attract local and foreign investment as well as loans from bilateral and multilateral
agencies. These investments could be channeled for infrastructure development as
well as for the post-conflict reconstruction and relief effort, thereby increasing
country’s production and job creation in the long run and lay the foundation for future
economic growth and enhance macroeconomic stability.
Under the 20-month SBA Program, the final tranche will be disbursed in March 2011.
The loan is repayable within 4 years commencing April 2012. The rate of interest of the
SBA facility is composed of two components; the service charge and a fixed margin.
The service charge is calculated weekly, based on the SDRs rate (which at present is 0.3
per cent per annum) while the fixed margin is 1 per cent per annum for the
outstanding loan amount up to 300 percent of the quota. When the outstanding loan
amount exceeds 300 per cent of the quota, a surcharge of 2 per cent per annum is to
be levied. The interest rate of the SBA facility is significantly lower than the prevailing
market rates.
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A schedule of IMF facilities obtained by Sri Lanka during the period 1977 to 2009 is set
out in Annexe I.
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Annexe I
Year
IMF Loans During 1977 to 2009 (SDR Mn)
Amount
Description
Approved
Amount
Drawn
1977
1979
Stand-by Arrangement
IMF Drawings
-
133.6
29.7
1980
Extended Fund Facility arrangement
-
55.1
1981
-
176.0
1982
Compensatory Financing Facility and
Extended Fund Facility
Compensatory Financing Facility
-
39.2
1983
Buffer Stock Financing Facility
-
35.8
1983
Stand-by Arrangement
100.0
50.0
1988
-
153.4
1989
Compensatory Financing Facility and
Structural Adjustment Facility
Structural Adjustment Facility
156.2
156.2
1991
Poverty Reduction & Growth Facility
336.0
280.0
2001
Stand-by Arrangement
200.0
200.0
2003
Poverty Reduction & Growth Facility
269.0
38.4
2003
Extended Fund Facility
144.4
20.7
2005
Emergency Assistances for Natural
Disasters
Stand-by Arrangement
103.4
103.4
1,653.6
-
2009
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