The IMF offers Sri Lanka a $2.6 billion loan with relatively few strings attached

The IMF on July 24th approved a US$2.6bn loan to the Sri Lankan government. The 20-month standby facility is intended to bolster dwindling foreign-exchange reserves, and may indirectly relieve the country’s burgeoning fiscal crisis. Despite intense speculation to the contrary, human-rights concerns have not prevented the loan from being made. In some respects the IMF has been remarkably lenient in the conditions it has attached to the loan. However, the budget projections on which the agreement is based are overoptimistic, and the government will struggle to fulfil this part of its obligations.

The US$2.6bn loan, of which US$322m will be available immediately, is considerably more than the US$1.9bn that Sri Lanka had originally requested. This reflects the deteriorating macroeconomic situation on the island, which faces acute fiscal and balance-of-payments (BOP) problems. The IMF stand-by arrangement formally targets the BOP position only, and is intended to help the central bank shore up foreign-exchange reserves. Such reserves declined by 59% between August 2008 and January 2009—reflecting a doomed effort to prop up the currency and a big outflow of foreign portfolio investments. According to the IMF, administering BOP support should help to create a macroeconomic climate more conducive to Sri Lanka receiving support from other donors. …