IMF eyes 2.5 bln dlr loan for Sri Lanka

The International Monetary Fund has announced a tentative agreement with Sri Lanka to provide a 2.5 billion dollar loan to help the war-battered country weather the global financial crisis.

IMF managing director Dominique Strauss-Kahn said that an IMF staff mission had reached an agreement with the Sri Lankan authorities on an economic program that "could be supported" by a 20-month stand-by credit.

The loan is worth 1.65 billion Special Drawing Rights (SDRs), an IMF asset that is based on a basket of currencies -- the dollar, yen, euro and pound -- and calculated daily.

The IMF executive board is expected to consider the program on Friday, the 186-nation Washington-based institution said.

If approved by the board, Sri Lanka would be eligible to draw about 313 million dollars immediately.

The Sri Lankan government had requested a 1.9 billion dollar loan in March to help stave off its first balance of payments deficit in four years after foreign currency reserves fell to around six weeks' worth of imports.

The loan was delayed after the United States, Britain and other countries said the government was not doing enough to avoid civilian casualties as it closed in on the remnants of the once-powerful Tamil Tiger army.

Sri Lanka crushed the militant Tamil Tigers -- who had been fighting to carve out a separate state for minority Tamils since 1972 -- in mid-May by killing the leadership of the rebels. The civil war claimed between 80,000 and 100,000 lives.

Strauss-Kahn noted that the global financial crisis had applied a sharp brake to the short-term financing from international markets that the Sri Lankan government had relied on to deal with persistently high budget deficits.

"The global financial shock resulted in a sudden stop to this financing, capital outflows, and a significant loss of Sri Lanka?s international reserves," he said.

Despite recent capital inflows, the tiny Asian country's international reserves "remain at low levels," he said.

"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," he said.

The Sri Lankan government in early July raised its 2009 economic growth forecast to a range of 3.5-4.5 percent, from the 2.5-3.0 percent expansion estimated at the beginning of the year.

Analysts said the end of the war with the Liberation Tigers of Tamil Eelam (LTTE) had opened avenues for wider economic activity and will spur future investments, especially into areas like infrastructure to reap the post-war benefits.

Strauss-Kahn said the government had developed an "ambitious program aimed at restoring fiscal and external viability and addressing the significant reconstruction needs of the conflict-affected areas."

The IMF-supported economic program would also provide a framework for international donors to help finance the government's 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's quota in the IMF," Strauss-Kahn said.

The United States, the main shareholder in the IMF and whose approval is key to the release of the money, has welcomed the end to the Sri Lankan fighting but urged Colombo to meet the needs of the roughly 300,000 displaced people who remain in temporary government shelters.

The United Nations has also been at odds with the Sri Lankan government over its treatment of the displaced persons.

Critics say the people in the camps, which are guarded by the military, are being subjected to prison-like conditions.

Sri Lanka's Human Rights Minister Mahinda Samarasinghe said earlier this month all international relief agencies, including the International Committee of the Red Cross, had been asked to scale down operations following the defeat of the rebels.

The Red Cross on Monday announced the closure of four offices in Sri Lanka following the government order.