Sri Lanka to request IMF waiver on deficit

The IMF nameplate is displayed on a wall at the headquarters in Washington April 11, 2008.

COLOMBO (Reuters) - Sri Lanka will seek a waiver from the International Monetary Fund (IMF) after failing to meet the 2009 budget deficit target agreed under a $2.6 billion loan deal, the central bank said on Monday.

The IMF said late last month that it was delaying the third tranche of the loan, approved last July to help Colombo avert a balance of payments crisis. The third tranche is worth around $318 million of the remaining loan of around $2 billion.

Delays in IMF disbursements could undermine foreign investment as Sri Lanka seeks to recover from a 25-year civil war, and could also raise the costs of borrowing via a 10-year, $500 million sovereign bond sovereign bond it expects to sell later this year.

"When they (the IMF's mission to Sri Lanka) go to their board, we will request a waiver (to allow the frozen payments to resume)," K.D. Ranasinghe, the chief economist at the central bank, told Reuters in an interview.

"The deviations (from the budget target) are for good reasons," he said, referring to higher-than-expected spending on post-war reconstruction and infrastructure projects.

Sri Lanka also hoped to renegotiate the IMF target for its 2010 budget deficit, Ranasinghe added.

Sri Lanka's 2009 deficit hit an eight-year high of 9.7 percent of gross domestic product, well above the 7 percent target agreed with the IMF, and authorities have said it would also miss its goal for 2010.

However, Sri Lanka has achieved its end-2009 monetary and reserves targets comfortably, central bank data showed.

"We want to see the goals they lay out in the budget are consistent with fiscal consolidation goals that they laid out in the original programme," Sri Lanka's IMF resident representative Koshy Mathai told Reuters.

"We are not going to dwell on the past. We will use the good 2010 budget itself to correct this measure against the missed fiscal target in December and then to go forward."

The IMF loan has helped to stabilise the rupee currency and boost foreign investor confidence.

The IMF said on Feb. 25 that it was delaying the third tranche of the financing until it sees the new budget, which is expected after April 8 parliamentary elections.

Since the announcement of the delay, foreign investors have sold a net 2.2 billion rupees ($19 million) worth of shares on the local stock exchange.

The IMF deal requires Sri Lanka to reduce its budget deficit to 6 percent of GDP by the end of this year to ensure the next six tranches of the loan are disbursed without delays.

However, the finance ministry has already estimated the deficit at 7.5 percent and Ranasinghe said the government will renegotiate the numbers when the IMF mission comes after the election.

The 6 percent target would exclude the cost of reconstruction in the war-torn north and east, Ranasinghe added.

(Editing by Kim Coghill/Ruth Pitchford)