February 25, 2010 / 5:29 PM / 10 years ago

IMF delays third tranche of $2.6 bln Sri Lanka loan

COLOMBO (Reuters) - The International Monetary Fund said on Thursday it is delaying the third tranche of a $2.6 billion loan to Sri Lanka after the government missed its 2009 deficit reduction targets.

IMF officials told a news conference that Sri Lanka’s domestic budget borrowing — consistent with a budget deficit target of 7 percent of gross domestic production — was exceeded by a substantial amount.

“It would be more than 1.5-1.75 percent than the target, but we haven’t seen the final number yet,” said Brian Aitken, the IMF mission head to Sri Lanka. “The third tranche will be delayed and completed when the budget is formulated after the election.”

The central bank had earlier said that the $40 billion economy likely missed 2009 budget deficit goal of 7 percent set by the IMF as a condition for the loan.

The third tranche is worth around $318 million of the remaining loan of around $2 billion and was planned to be approved this month after considering the island nation’s commitment to the IMF targets.

Sri Lanka has not presented its full year budget for this year due to two national elections in the first four months. The parliamentary polls are scheduled on April 8 after President Mahinda Rajapaksa won his re-election on Jan. 26.

“We agreed with the government under these circumstances, it makes sense for us to re-engage in a more comprehensive way following the elections and formation of new cabinet, in the context of a new budget,” Aitken said.

The third tranche review will be completed in May, he said.

“The government has expressed strong desire to bring the programme back into a situation where we continue the support.”

The rupee currency fell on Thursday and shares gained on retail buying. Analysts said delay could dent foreign investor sentiment, though Sri Lanka is poised to grow at 6 percent this year and has over $5 billion reserves.

“It could have a serious impact on investor confidence and perhaps they could pull out money,” said Chrishani Ekanayake, an economic consultant at Frands Consultant.

HIGH BORROWING COST?

Some analysts said the move could raise Sri Lanka’s borrowing cost for a 10-year, $500 million sovereign bond, which the central bank expects to sell later 2010 and pave way for possible rating downgrade.

However, the Central Bank Governor Ajith Nivard Cabraal told Reuters: “There is absolutely no impact at all.”

Foreign investors have invested over $1.6 billion in government securities to its maximum limit of 10 percent since the end of the war in May. However, foreign direct investment had fallen a third last year compared to 2008.

Offshore investors have also been net sellers the island nation’s bourse, which was one of the best world performers with 125 percent return last year. Foreigners have sold a net of $42.5 million worth shares so far this year.

The $2.6 billion loan was granted to Sri Lanka in July to avert a balance of payment 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 global investor confidence in post-war Sri Lankan government securities and the stock market. It also helped to stabilise interest rates and to sell a 5-year, $500 million sovereign bond last year.

With the post-war IMF backing, the country’s borrowing cost fell with its both international bonds , are now trading at below their coupon rates.

So far, the IMF has released around $635 million to the government based on the fiscal performance of the Indian Ocean island following the end of its long 25-year civil war last May.

The IMF has set an even tougher target for Sri Lanka’s budget deficit this year at 6 percent of GDP.

Cabraal told Reuters on Tuesday that it would be challenging to meet that level due to high government spending required for post-war reconstruction.

However, Aitken said there was no discussions to revise 2010 deficit target so far, but the IMF will engage in constructive discussions to see whether the request is appropriate, if any.

Sri Lanka’s newly re-elected president vowed earlier this month to regain the progress lost in the quarter-century war with Tamil Tigers separatists by boosting the country’s economy and unifying its people.

Additional reporting by by Ranga Sirilal

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