The International Monetary Fund has issued a statement warning Sri Lanka from building up its foreign currency reserves by borrowing from overseas investors.
Sri Lanka’s foreign currency reserves reached a high of $4 billion, as estimated by Central Bank, enough to cover four months of imports and the highest in the island’s history.
This is in stark contrast to earlier in the year, at the height of the civil war, when foreign currency reserves fell to $1.7 billion, enough to cover just one month’s worth of imports. Foreign investors also withdrew over $600 million in government bills and bonds, as the climax of the war coincided with the global economic crisis.
The reserves were built up by the sale of government debt to foreigners. "Total net foreign inflows to the government Treasury bills and bonds since mid May 2009 to 11 September 2009 amounted to US$ 1.2 billion,” said Central Bank governor Nivard Cabraal.
However, this has aggravated the International Monetary Fund, which is providing a $2.6 billion loan to Sri Lanka.
"We don't want Sri Lanka to borrow its way to build reserves," said head of the IMF mission to Sri Lanka, Brian Aitken. "The central bank has been building a war chest of reserves lately through debt. We would prefer if Sri Lanka built up reserves from exports and from remittances and not by borrowings."
Mr Aitken was in Colombo on a two week review of the island’s economy, as the loan is to be paid in instalments, subject to quarterly reviews. After the first instalment of $322.2 million was paid in July, the second is awaiting approval from the IMF executive board. IMF offices have also re-opened in Colombo, in order to keep a close eye on its lending programme. The organisation left the country in 2007, when it decided that it would no longer lend to the island.
Meanwhile, Iran has agreed to extend an interest free credit facility to Sri Lanka for one more year, to purchase Iranian crude oil.
In November 2007, after President Rajapakse’s visit to Iran, this facility was first introduced, which allowed Sri Lanka to import more than $1.05 billion worth of crude oil in 2008.
"There was no denying that the country was hard pressed for foreign currency to fund the purchase of essential military hardware," an official said. He said, "Last year, crude oil imports exceeded US$1 billion in total value with Sri Lanka not having to pay hard cash to open Letters of Credit, while Iran provided 4 months interest free credit and a further three months at a concessionary rate of interest."
Iran also agreed to supply $1.03 billion in order to fund the refurbishment and expansion of the Ceylon Petroleum Corporation owned oil refinery at Sapugaskanda. This is repayable over 15 years, with a 5 year grace period. Current plans, forecast that at the end of the project, oil output capacity will be doubled from 50,000 to 100,000 barrels of oil a day.
