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Sri Lanka looks for extension of IMF loan, as governor calls for ‘no fiscal slippage’ ahead of elections

Sri Lanka’s Central Bank Governor has said Colombo may look to extend a loan agreement from the International Monetary Fund (IMF), which was frozen amidst political turmoil on the island, He called on the government not to make any political concessions with the country’s budget ahead of forthcoming elections.

"There is a provision for the Extended Fund Facility (EFF) to be extended by a year," said Indrajit Coomaraswamy. "The government could negotiate if it wants to."

The current three year EFF is worth around US$1.5 billion and was due to end later this year. However, the program was put on hold after the island plunged into political crisis with the attempted appointment of Mahinda Rajapaksa, the former president who oversaw the killing of tens of thousands of Tamils, as Sri Lanka’s prime minister.

The loan program has not been resumed as of yet. However, “[the] IMF welcomed the resolution of the political crisis in the country and it is now standing ready to resume programme discussions,” Ting Yan, Information Officer in the IMF’s Communications Department told the Business Times in an e-mail this week.

Speaking on the EFF, Coomaraswamy added that extension “is an option”.

“We have to see is how much more money we need and what are the terms and conditions,” he added.

In the wake of Sri Lanka’s political turmoil, several major international agencies downgraded the government’s credit rating, in what was seen as a blow to the island’s economy. Referring to the ratings, Coomaraswamy also said,

“Now that we have been downgraded, we have had to renegotiate with various financing sources… If we have an undisciplined budget and poor policies, we will be downgraded again. We will lose access to capital markets.”

The current Sri Lankan government was warned by the governor not to make any political concessions as elections loom later this year.

“I get very disturbed because everybody, even fairly well-informed people, say the election is coming so they will have to loosen policy,” he said. “We cannot keep making the same mistakes.”

The government has to be “careful to ensure there is no fiscal slippage, despite the elections.”

See more from EconomyNext here, the Business Times here and WSWS here.