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UPDATE 1-IMF delays third tranche of $2.6 bln Sri Lanka loan

[Reuters, Thursday, 25 February 2010 12:21 No Comment]

The International Monetary Fund said on Thursday it is delaying the third tranche of a $2.6 billion loan to Sri Lanka after the government missed its 2009 deficit reduction targets.

IMF officials told a news conference that Sri Lanka’s domestic budget borrowing — consistent with a budget deficit target of 7 percent of gross domestic production — was exceeded by a substantial amount.

"The third tranche will be delayed and completed when the budget is formulated after the election," said Brian Aitken, the IMF mission head to Sri Lanka.

The third tranche is worth just below $2 billion.

The central bank had earlier acknowledged that the $40 billion economy likely missed last year’s budget deficit goal of 7 percent set by the IMF as a condition for the loan.

Analysts and economists believe the budget deficit may have exceeded 8.5 percent, close to the 9 percent recorded in 2008. [ID:nLDE61E18Z]

The $2.6 billion loan was granted to Sri Lanka to avert a balance of payment crisis following the global economic crisis on condition that it get its spending under control.

So far, the IMF has released around $650 million to the government based on the fiscal performance of the Indian Ocean island following the end of its long 25-year civil war last May.

The IMF has set an even tougher target for Sri Lanka’s budget deficit this year at 6 percent of GDP.

Central bank chief Ajith Nivard Cabraal told Reuters on Tuesday that it would be challenging to meet that level due to high government spending required for post-war reconstruction.

Sri Lanka’s newly re-elected president vowed earlier this month to regain the progress lost in the quarter-century war with Tamil Tigers separatists by boosting the country’s economy and unifying its people.

Mahidna Rajapaksa was re-elected by a landslide on Jan 26.

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