The International Monetary Fund (IMF) has warned Sri Lanka against issuing government bonds in order to build up foreign currency reserves, as Sri Lanka received the second instalment of a $2.6 billion loan.
"There is a difference between borrowed reserves and reserves collected from the current account (of the balance of payments), like booming exports," IMF resident representative in Sri Lanka, Koshi Mathai, told reporters.
"There is always a risk that money could go out if (global) investors change their mind," he said.
This is the second warning issued by the IMF to Sri Lanka, after Colombo earlier built up reserves by borrowing from overseas investors.
The second instalment of the loan, worth $329.4 million dollars, helped top
Earlier in the year, at the height of the civil war, foreign currency reserves fell to $1.7 billion, enough to cover just one month’s worth of imports.
Sri Lanka was also warned about its high budget deficit, which the government was told to keep at 7% of its GDP.
"The government obviously recognises this is a difficult target to meet. We will just have to see what happens and that will be an issue for future (IMF) reviews," continued Mathai.
"Sri Lanka is still a country with a high debt stock, and having high debt stock is fundamentally not conducive to good economic management."
In order to fully receive all instalments of this loan from the IMF, Sri Lanka has an agreement over a list of set conditions which it must meet.
Amongst them, the budget deficit has to be reduced to 5% of GDP by 2011, a target which seems increasingly unlikely.
In order to try and appease the IMF further,
The government has not yet released next year’s budget, but instead presented a “vote-on-account” in a letter of intent, pledging to limit spending in the first third of 2010.
The International Monetary Fund bailout package was granted to help ease