Sri Lanka suspends loan deal with IMF

COLOMBO, Jan 30 (Reuters) Sri Lanka, which is locked in a row with the International Monetary Fund over its exchange rate policy, will not draw the remaining $800 million of a $2.6 billion loan from the global lender due to the high interest rate, the governor of the central bank said on Monday.

The islandnation has already received $1.8 billion of the loan in seven tranches since July 2009, but the IMF has withheld the eighth payment since September after the central bank failed to allow flexibility in the rupee exchange rate.

“If we do not draw any further money we will have to pay only a 1.1 percent interest rate for the entire loan. But otherwise for the entire loan of $2.6 billion, we will have to pay 3.1 percent,” Central bank Governor Ajith Nivard Cabraal told Reuters in an interview.

“With the U.S. Federal Reserve saying that they are going to hold rates until 2014, which are almost zero, that puts a lot of pressure on someone borrowing at 3 percent. That is why we thought it is better for us to not to take any money.”

Given the central bank’s failure to allow flexible exchange rate, markets had been expecting a ‘make or break’ decision either from the IMF or central bank on the loan, which was extended by another year with a waiver in 2011.

Sources close to the IMF have told Reuters that a flexible exchange rate would be the key to move forward with the loan.

The loan programme and the end of a 25year civil war in May 2009 have helped revive foreign investor confidence in the $59 billion economy.

The central bank has spent more than $1.07 billion keeping the exchange rate steady since a 3 percent devaluation on Nov. 21, after spending a net $1.61 billion from JulyOctober to keep depreciation at bay.

That has cost it a third of its record reserve total of $8.1 billion held at end July.

The IMF loan was meant purely to boost the country’s reserves, and central bank officials say there will not be any fiscal adjustments required due to the decision.

Sri Lanka’s reserves were at $6 billion by end-2011.

An IMF mission is in talks with Sri Lankan authorities to assess the country’s economic performance under the loan.

“I can tell you, in all the meetings, there was not even one discussion took place on that,” Cabraal told, referring to the exchange rate policy.

The central bank has refused to stop defending the currency, arguing it has the reserves to pay for it in anticipation of inflows in the first quarter that will stem depreciation pressure.

Sri Lanka’s ability to meet fiscal and reform targets spelled out under the loan programme and its postwar economic performance have been key gauges for global credit rating agencies, and economists expect any negative comments from the IMF could have an adverse impact on the country’s borrowing costs.

Sri Lanka’s IMF country representative Koshy Mathai said it was up to Colombo to decide if it wanted to draw the remaining money under the programme.

“We are happy to be involved in whatever way the Sri Lankan government and central bank find most useful,” Mathai told Reuters.

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