Upon the Executive Board's approval, an amount equivalent to SDR 206.7 million (about US$322.2 million) becomes immediately available to Sri Lanka. The remaining amount will be phased in, subject to quarterly reviews. The total amount of IMF resources made available under the arrangement equals 400 percent of the country's quota.

The key objectives of the authorities' economic reform program supported by the Fund are to strengthen the country's fiscal position while ensuring the availability of resources for much needed post-conflict reconstruction and relief efforts. The program is also intended to rebuild international reserves and strengthen Sri Lanka's domestic financial system, and to protect the most vulnerable in the country from the burden of the needed economic adjustment. The program aims to lay a strong macroeconomic foundation that will help the authorities approach the broader international community for financial support in post-conflict reconstruction.

Following the Executive Board discussion on Sri Lanka, Mr. Takatoshi Kato, Deputy Managing Director and Acting Chairman, stated:

“The global financial crisis has had a significant impact on Sri Lanka's economy. Persistently high budget deficits forced the government to rely on short-term financing from international markets. The global shock resulted in a sudden stop to this financing. Capital outflows and intervention by the central bank to prevent the exchange rate from depreciating—exacerbated by a decline in demand for Sri Lanka's exports—resulted in a significant loss of international reserves which, despite the recent rebound in capital inflows, remain very low.

“The government's ambitious program, supported by the IMF, intends to restore fiscal and external viability and address the significant reconstruction needs of the conflict-affected areas, thereby laying the basis for future higher economic growth.

“Reducing the central government fiscal deficit, while preserving spending on health and education and protecting the most vulnerable in society from the economic downturn, is a central goal of the government's program. To that end, the authorities have put in place revenue enhancing measures and intend to introduce reforms to reduce tax exemptions and broaden the tax base beginning in the 2010 budget. This, together with savings on military spending and possible concessional donor financing, should help finance the considerable reconstruction spending needs.

“The program aims to rebuild reserves to prudent levels while allowing the flexibility in the exchange rate necessary to boost the competitiveness of Sri Lanka's exports. At the same time, the central bank's policies will aim to control inflation while ensuring adequate credit to the private sector.

“The government has also moved quickly to address vulnerabilities in the banking system, implementing a plan to recapitalize the troubled Seylan Bank. The government intends to develop a contingency plan to deal with potential stresses in the financial system and put in place measures to improve regulation and address financial sector supervisory gaps.

“The government's program will require difficult economic reform measures. Nevertheless, the government should take advantage of the opportunity created by the end of the conflict to ensure national reconciliation, restore macroeconomic stability, and promote strong and durable growth,” Mr. Kato said.#