Central Bank Governor Ajith Nivard Cabraal said the US$ 2.6 billion standby facility couldn’t be used by the government as it would be credited directly to the bank in eight equal instalments to help it improve Sri Lanka’s balance of payments.

"These funds cannot be directly used by the government though the Central Bank can use the facility to sell dollars to the government when foreign debt obligations have to be met," Cabraal told a press conference on Monday evening.

"If the government can come up with the rupees we will sell them the dollars," he said.

According to the Central Bank, foreign debt amortisation for 2009 amounts to US$ 225 million, of which US$ 125 million had already been settled. There are no foreign debt amortizations in 2010.

The facility would be disbursed in eight equal tranches over a 20 month period with the first US$ 322 million expected on Tuesday (July 28).

Dr. Nandalal Weerasinghe, Chief Economist of the Central Bank said the facility would be used to boost the country’s foreign currency reserves enough to finance imports for three and half months. He said this could be done within a much shorter period than the 20 months as stipulated in the Letter of Intent.

According to the Letter of Intent, Sri Lanka has agreed to work towards more fiscal discipline, build its official reserves and allow the exchange rate to be more flexible.

Enhancing revenue and consolidating expenditure are in line with the government’s own Medium Term Fiscal Framework towards consolidating fiscal deficits and Cabraal said the IMF had endorsed this framework by approving the IMF loan based on the governmentown policy initiatives.

"It was proposed in the earlier budget of the government that the fiscal deficit would be gradually brought down to 5 percent of GDP by 2011, and this is exactly what we told the IMF we would be doing," Cabraal said.

The government hopes to broaden the tax net to enhance revenue generation which had decreased by 10 percent year-on-year during the first four months of 2009.

Dr. Weerasinghe said the Central Bank expected imports to pick up during the second half of this year, which is also expected to revive the tax incomes of the government.

On the expenditure side, Cabraal said the Central Bank would advise the government on this.

"Expenditure is not about cutting expenditures. We will advise the government on how it can achieve the required budget deficit target," he said.

The government had already made several adjustments with regard to State-owned enterprises such as the CPC and CEB (see today’s Island Financial Review page 1).

The Letter of Intent to the IMF stipulates that the budget deficit would be 7 percent of GDP this year, up from the 6.5 percent estimate set out in the 2009 Budget.

"Due to the problems we have had due to the global economic crisis, we would not be able to achieve a budget deficit of 6.5 percent of GDP but the IMF was ready to hear us out and agreed to the target of 7 percent," Cabraal said.

Although the IMF has endorsed the government’s own initiatives, the disbursement of the loan will be subject to reviews on the government’s progress and the Central Bank is confident these would be successful.

The Budget Call 2010 has already instructed ministries, provincial councils, state-owned enterprises and statutory bodies that expenditure levels for 2010 must not exceed those of 2009. There would be stricter control on requests for funding for new capital expenditure and tightening recruitment.

The repayment of the IMF facility would commence from April 2012.

A service charge of 0.3 percent would be calculated weekly while a maximum of 3 percent per annum would be levied on the outstanding loan amount.

In the past, the IMF had insisted on privatisation of State-owned enterprises and cuts to welfare and subsidy payments.

"This time the IMF has worked on a implementable and workable model based on the government’s own policies," a senior Central Banker told the Island Financial Review.