February 26, 2019 / 9:32 AM / 3 months ago

Sri Lanka asks IMF for 1-yr loan extension, relax tight spending targets - sources

COLOMBO, Feb 26 (Reuters) - Sri Lanka has asked the International Monetary Fund (IMF) to extend a $1.5 billion loan by another year and relax its tight spending targets ahead of key elections, two government sources close to the negotiations told Reuters on Tuesday.

The loan is crucial for Sri Lanka, which plans to sell up to $3 billion of bonds as early as next week and needs the IMF programme to continue to ensure more attractive borrowing terms.

The global lender delayed discussions on the sixth tranche of a three-year loan in November after a political crisis that has led to a slump in economic growth on the island.

At the time, the IMF said it had suspended the programme until it had more clarity on the political situation, after President Maithripala Sirisena abruptly sacked his prime minister in a move that was later ruled unconstitutional.

The government has requested the IMF push back its deficit target of 3.5 percent of gross domestic product (GDP) agreed under the loan programme to 2021 from 2020, a senior government official familiar with the discussions told Reuters.

“The discussions were focused on budget deficit and expenditure numbers,” the source said.

“We will not deviate from the fiscal consolidation path. But expenditure cannot be drastically curtailed this year, given it is an election year. We hope there could be a compromise.”

A second official said Colombo had told the lender that an IMF-backed revenue act, which was a condition for granting the loan, also needs amendments.

Officials from the IMF were not immediately available for comment. The talks will end on Thursday.

The IMF has disbursed over $1 billion of the $1.5 billion loan agreed in 2016. It was designed to avert a financial crisis and support the economic reform agenda of President Maithripala Sirisena’s coalition government.

Sri Lanka is due to hold a presidential election this year and parliamentary polls in 2020.

Junior Finance Minister Eran Wickremeratne told Reuters that the government will move ahead with a plan to sell sovereign bonds after the IMF discussions conclude.

Sri Lanka is struggling to repay its foreign loans, with a record $5.9 billion due this year, including $2.6 billion in the first three months. It used its reserves to repay a $1 billion sovereign bond loan in January.

The South Asian island nation failed to finalise financing it had planned in the first quarter, including a $300 million loan from Bank of China and a $400 million swap from Reserve Bank of India.

Sirisena’s abrupt change of prime minister and decision to dissolve parliament created panic and uncertainty among investors, who dumped Sri Lankan government bonds and other assets, sending the rupee currency to record lows.

The move was later ruled unconstitutional and Ranil Wickremesinghe was reinstated as prime minister after 51 days. (Reporting by Shihar Aneez, Editing by Alasdair Pal & Kim Coghill)

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