IMF grants third tranche of $2.6 bln Sri Lanka loan

COLOMBO (Reuters) - The International Monetary Fund will pay out the delayed third tranche of a $2.6 billion loan to Sri Lanka, saying the government was planning to tackle its weak finances in the 2010 budget to be announced on Tuesday.

The IMF nameplate is displayed on a wall at the headquarters in Washington April 11, 2008. REUTERS/Jonathan Ernst/Files

The IMF in February had delayed the payment after the government missed its 2009 deficit reduction targets and said that domestic budget borrowing -- consistent with a deficit target of 7 percent of gross domestic product -- was exceeded by a substantial amount.

“Despite the weaker-than-programmed 2009 fiscal performance, the government’s 2010 budget proposal, if carried out, would significantly address past fiscal slippages,” Naoyuki Shinohara, IMF deputy managing director and acting chair, said in a statement after a review of Sri Lanka’s economic performance.

“Overall economic conditions in Sri Lanka are improving and the economy is likely to show strong growth this year,” he said.

The completion of the IMF review means that it can immediately pay an amount equivalent to 275.6 million in special drawing rights ($408 million).

The $42 billion economy grew 7.1 percent in the first quarter from a year earlier, picking up from annual growth of 6.2 percent in the fourth quarter last year.

Both the central bank and the government expect 7 percent growth this year, up from an eight-year low of 3.5 percent in 2009, as low interest rates encourage business activity.

The central bank had earlier said the country had likely missed its 2009 budget deficit goal of 7 percent set by the IMF as a condition for the loan.

Sri Lanka’s poll delayed the budget for 2010. A budget document showed Sri Lankan government expenditure for 2010 is estimated at 1.78 trillion rupees, up 1.9 percent from a year ago.

The global lender also said that its executive board had approved a request by the government to extend a stand-by arrangement by another year and break down future disbursements into seven equal amounts of SDR 137.8 million ($204 million) in the light of the recent delays.

The $2.6 billion loan was granted last July to avert a balance of payments crisis following the global economic crisis on condition that it get its spending under control.

The loan has helped to stabilise the rupee and boost investor confidence in government securities and the stock market.

Additional reporting by Shihar Aneez; Editing by Jan Dahinten