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COLOMBO, Feb 12 (Reuters) - Sri Lanka has decided not to pursue a new loan from the International Monetary Fund after the global lender indicated the government had made considerable progress in stabilising its finances, the central bank said on Tuesday.
The island nation and the global lender started preliminary discussion for an extended fund facility last July and the central bank had said the plan should support development activities.
But after several months of discussions, the central bank said the IMF had indicated Sri Lanka does not warrant further unconventional and exceptional financial support in light of recent improvements in its fiscal situation.
"Sri Lankan authorities have decided not to pursue a new programme with the IMF, but to continue maintaining the close relationship with the Fund under standard consultation processes similar to many other member countries," the bank said.
"The IMF has also been of the view that Sri Lanka has now developed well-established access to international capital markets and therefore budget support, if necessary, could be conveniently accessed from such market sources and hence there is no need to access the Fund for such budget financing."
A $2.6 billion IMF loan programme agreed in 2009 has helped Colombo keep its inflation rate in the single digits, boost its badly-depleted reserves to a record high and reduce the fiscal deficit and debt-to-GDP ratio to manageable levels. The final tranche of that loan was disbursed last summer.
Under the plan, Sri Lanka took a series of steps, including allowing a flexible exchange rate and raising interest rates.
Koshy Mathai, the IMF resident representative for Sri Lanka, declined to comment on the latest development. The IMF has scheduled a media conference on Wednesday at 0715 GMT.
Both the central bank and IMF have declined to comment on the size of the loan that was being dsicussed, but two central bank sources have told Reuters Sri Lanka could have gone for up to $1.6 billion under the extended fund facility.
Sri Lanka has successfully issued five sovereign bonds since its debut $500 million bond in 2007 and all of the issues were oversubscribed, with the island nation was able to tighten the yield curve gradually.
The central bank said the authorities had expressed their interest in a future IMF programme, only if such a programme entailed support to finance the budget within the announced fiscal consolidation process.
The Sri Lankan government has already committed to bring down the fiscal deficit to 5.8 percent of the gross domestic product in 2013 and below 5 percent in the medium term.
Danushka Samarasinghe, the research head at Colombo based TKS Securities said expensive borrowing will discourage Sri Lankan government from un-necessary spending and thus keeping a tab on inflation.
Sri Lanka's foreign direct investment in 2012 was half of its projected target $2 billion and the government is in need of foreign money to fund its ambitious post-war infrastructure programme.
Political risk consultancy Eurasia Group said in a note that though the $59 billion economy's foreign exchange reserves are at a strong position, it is potentially more vulnerable than it appears.
"The country's high external debts, weaker than expected exports, and lower than projected FDI could strain reserves, and the government is also due to repay the equivalent of nearly $1 billion in rupee-denominated bonds that mature this year."
In January, Treasury Secretary P.B. Jayasundera said the discussion with IMF was for a two-year special facility. (Reporting by Shihar Aneez and Ranga Sirilal; Editing by Kim Coghill)