After several months of prevarication, on 24 July the International Monetary Fund's (IMF) Executive Board approved its largest single line of credit ever offered to Sri Lanka. The staggering USD 2.6 billion loan is significantly higher than the initial request of USD 1.9 billion, and its magnitude is best appreciated through comparison with the island's total foreign debt of USD 12.5 billion, as of the end of 2008. The first instalment of USD 322 million was disbursed immediately; subject to periodic review, seven further allotments will now follow until March 2011. Yet with the agreement signed and the money now flowing, the loan remains the centre of intense debate both at home and abroad.
Even in the months leading up to the IMF's decision, the loan was embroiled in controversy. Overseas, there was disgruntlement regarding the message it could send regarding the humanitarian and human-rights situation; at home, there was anxiety over perceived threats to sovereignty and a potential 'debt trap'. One group, the New York-based Human Rights Watch, protested that the loan would be construed as a "reward for bad behaviour, not an incentive to improve"; in a statement on 22 July, it called upon the IMF to "make the release of each new tranche of funds contingent on tangible human rights progress." The loan has certainly been greeted in Colombo as another victory, following that in May over the LTTE. However, as Dushni Weerakoon of the quasi-governmental Institute of Policy Studies commented in early August, "Victory is not something you would normally associate with an IMF loan … you approach the IMF when you have run out of options." Still, in a sign of the times in post-war Sri Lanka, it is now apparently 'un-patriotic' to criticise dealings with an international financial institution that was once reviled as an agent of neo-colonialism by many of the constituents in the centre-left United Peoples Freedom Alliance (UPFA) coalition.
The avowed objective of this 'stand-by agreement', which provides short-term support for the country's balance of payments, is to boost foreign reserves, which plummeted over the past year as military spending ballooned. The loan itself is being touted by both the government and the IMF as a vote of confidence in the flagging Sri Lankan economy, as well (many hope) as a catalyst for foreign direct investment. It certainly provides a lifeline to the government in its preparation of the November budget, which will precede snap presidential and scheduled parliamentary elections in 2010.
The application for the loan was first made in March, and approval was anticipated shortly thereafter. However, the Sri Lankan request coincided with an intensification of its military campaign to eradicate the LTTE from its remaining stronghold in the island's northeast. Simultaneously, the international media began reporting on allegations of indiscriminate bombardment of Tamil civilians, including in the so-called no-fire zone, as well as on shortages of food, water and medicines for those trapped between the warring sides. Western diplomatic pressure was subsequently exerted to seek a negotiated end to the war. But sensing that the LTTE was cornered, and confident in the unconditional support it was receiving from a war-weary Sinhalese populace, the government became combative with both its foreign and its domestic critics. The IMF loan inevitably became entangled in these manoeuvrings, and it was only some two months after the LTTE's comprehensive military defeat that it was finally sanctioned. Even then, though, Argentina, France, Germany, the United Kingdom and the United States abstained from support, laying bare the rifts within the Fund's Executive Board.