The IMF said it has approved a US$ 2.5 billion standby facility for Sri Lanka last Monday with the possibility of ‘immediately’ releasing US$ 313 million once the IMF Executive Board formally approves the facility next Friday (24).

"An IMF staff mission reached agreement with the Sri Lankan authorities on an economic program that could be supported by a 20-month Stand-By Arrangement for an amount equivalent to SDR (Special Drawing Rights) 1.65 billion (about US$2.5 billion)," IMF Managing Director Dominique Strauss-Kahn said in a statement last Monday.

"The program is expected to be considered by the Executive Board on July 24. The approval by the Executive Board would enable Sri Lanka to draw an amount equivalent to SDR 206.7 million (about US$313 million) immediately," he said.

An IMF team was in Sri Lanka recently to review the latest developments after the war against the LTTE ended in May.

Since the earlier evaluation carried out in March did not capture the present economic conditions of the country, a Central Bank official told the Island Financial Review last week that that the government had desisted from signing the Letter of Intent.

The government has now submitted its Letter of Intent based on a more recent evaluation to the IMF.

A Letter Of Intent is prepared by a member country describing the policies it intends to implement in the context of its request for financial support from the IMF.

Strauss-Khan expressed concern over the Sri Lankan government’s ability to raise much needed foreign financing for its ‘persistently’ high budget deficits but said the government of Sri Lanka had taken some positive steps.

"The end of the conflict provides Sri Lanka with a unique opportunity to undertake economic reform and reconstruction, which would be key to laying the basis for higher economic growth in the years ahead," Strauss-Khan said.

"To this end, the (Sri Lankan) government has formulated an ambitious programme aimed at restoring fiscal and external viability and addressing the significant reconstruction needs of the conflict-affected areas.

"The IMF staff support this program, specifically the government’s goals of rebuilding reserves, reducing the fiscal deficit to a sustainable level, and strengthening the financial sector. It is also essential that the program cushion the most vulnerable from the needed adjustment," he said.

The full text of Strauss-Khan follows:

Dominique Strauss-Kahn, Managing Director of the International Monetary Fund (IMF), issued the following statement on Sri Lanka today:

"An IMF staff mission reached agreement with the Sri Lankan authorities on an economic program that could be supported by a 20-month Stand-By Arrangement for an amount equivalent to SDR 1.65 billion (about US$2.5 billion). The program is expected to be considered by the Executive Board on July 24. The approval by the Executive Board would enable Sri Lanka to draw an amount equivalent to SDR 206.7 million (about US$313 million) immediately.

"Persistently high budget deficits have forced the government to rely on short-term financing from international markets. The global financial shock resulted in a sudden stop to this financing, capital outflows, and a significant loss of Sri Lanka’s international reserves. Despite recent capital inflows, international reserves remain at low levels.

"The end of the conflict provides Sri Lanka with a unique opportunity to undertake economic reform and reconstruction, which would be key to laying the basis for higher economic growth in the years ahead.

"To this end, the government has formulated an ambitious program aimed at restoring fiscal and external viability and addressing the significant reconstruction needs of the conflict-affected areas. The IMF staff supports this program, specifically the government’s goals of rebuilding reserves, reducing the fiscal deficit to a sustainable level, and strengthening the financial sector. It is also essential that the program cushion the most vulnerable from the needed adjustment.

"The reconstruction effort will be a large undertaking, with significant spending needs. The government’s program aims to meet these needs while safeguarding debt sustainability by boosting revenue and reducing spending in other areas. This program will also provide a framework for international donors to assist the government in financing its reconstruction effort.

"The strong measures that the authorities are taking under the program justify the exceptional level of access to Fund resources—equivalent to 400 percent of Sri Lanka’ quota in the IMF. I would like to call upon the Sri Lankan authorities to work with the donor community to ensure an adequate level of financing for the reconstruction effort to lay the foundation for future growth," Strauss-Kahn said.