INTERVIEW-S.Lanka c.bank sees $1.9 bln IMF deal end June

Wed Jun 10, 2009 6:34am EDT

(Adds details, quotes)

By Shihar Aneez and C. Bryson Hull

COLOMBO, June 10 (Reuters) - Sri Lanka's request for a $1.9 billion International Monetary Fund (IMF) loan is expected to be approved by the end of June, the central bank governor said on Wednesday.

"The indication that we have received overall is, before the end of this month, it will happen,"Ajith Nivard Cabraal told Reuters.

Sri Lanka's request to the global lender of last resort got mired in politics after the United States said the loan should not be discussed while the final days of the the Indian Ocean island nation's war with the Tamil Tigers raged.

Britain and other European Union members have since followed suit, diplomats say. Although Sri Lanka declared victory in the 25-year war on May 18, it remains under western pressure over the deaths of civilians in the waning months of the conflict.

Sri Lanka began pursuing the loan in March, as it faced its first balance of payments deficit in four years after foreign currency reserves had dwindled to around six weeks of import cover.

The island economy was hit first by soaring import prices as global inflation spiked and then the global downturn and credit crunch. The global downturn is now over its worst, most analysts say.

"Now, little by little, the urgency of the IMF loan is reducing. It is not to say that we don't need it. The threat of a downturn is receding and Sri Lanka is getting some inflows now after the end of the war," Cabraal said.

Roughly $150 million has come back into the reserves from foreign purchases of treasury bills and bonds, while the central bank has mopped up $230 million from the market since May 18, to prevent the rupee appreciation and build up reserves.

The $40 billion economy had a balance of payments deficit of $1.23 billion, and foreign exchange reserves fell by 50 percent in the last four months of 2008 due to the central bank's protection of the rupee .LKR and withdrawal of foreign funds.

Nandalal Weerasinghe, chief economist at the central bank, said the IMF loan will be a two-year facility with tranches coming every quarter.

"The first year's disbursement will be higher than the second year. Immediately, after the approval of the loan there will be the upfront disbursement," Weerasinghe told Reuters.

The IMF will review performance against quarterly targets for net domestic financing, net reserves and reserve money before releasing the next tranche, Weerasinghe said.

The loan's interest rate should be around 3.5 percent with a 3-5 year repayment period, he said.

The IMF had no immediate comment, but last month said it expected a resolution to the matter soon.

The central bank has already started negotiations for more bilateral loans while awaiting the IMF loan.

"We are presently negotiating on $500 million from Libya and we are working on another facility of more than $500 million from another country as well," Cabraal said. (Editing by Neil Fullick)





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