IMF okays Sri Lanka loan after policy changes

The International Monetary Fund on Tuesday approved a delayed tranche of Sri Lanka's $2.6 billion loan with waivers after the island nation adopted a flexible exchange rate and took measures to avert a balance-of-payments crisis.
The global lender approved a $426.8 million disbursement after the seventh review of the programme, originally agreed with Sri Lanka in July 2009. A final tranche of about $400 million is to be released in a few months. The Fund also waived conditions that Sri Lanka meet end-December net foreign exchange reserves and reserve money targets. It had withheld the tranche since September owing to the central bank's failure to adopt a flexible rupee exchange rate policy. But the central bank introduced sweeping changes in foreign exchange and monetary policies, while the government raised fuel and electricity prices to ease fiscal burdens.
"The adjustment measures implemented by the authorities have placed the economy on a more sustainable trajectory," said Min Zhu, the IMF's deputy managing director and acting chair. "However, it will take time for the new monetary and exchange rate regime to become fully established, and the authorities will need to stand ready to adjust policies further to stabilise external reserves, especially if the global environment becomes less favourable."
The IMF said a combination of rapid credit growth and a tightly managed exchange rate had caused the external current account deficit to widen and spurred a sharp fall in foreign exchange reserves. Koshy Mathai, the IMF country representative in Sri Lanka, said the economy had not gone into overdrive, but cautioned there were some signs that bore watching.
"We'd still not say the economy is overheating. But credit and imports were a little higher," than expected, he told reporters in Colombo. The central bank in a statement said that with the IMF disbursement, foreign exchange reserves had risen to $6.1 billion, adequate to cover 3.6 months of imports. Reserves stood at around $5 billion in early March. The rupee strengthened sharply to close at 126.00/30 after the IMF loan approval, up from Monday's close of 128.25/30, while the stock market gained 0.3 percent.