The IMF cleared the loan of $216.6 million despite Sri Lanka missing the global lender's budget deficit target for the second straight year in 2010, extending the total disbursement to $1.5 billion.
It also waived end-December net domestic financing and net international reserves targets on Sri Lanka's request.
The IMF was broadly satisfied with the government's commitment on fiscal consolidation, but sought proper implementation.
"Improvements in fiscal performance are encouraging. The 2010 budget execution addressed past fiscal slippages and bolstered the credibility of fiscal policy," Naoyuki Shinohara, IMF deputy managing director and acting chair, said in a statement.
Sri Lanka missed the IMF budget deficit target of 6 percent last year after overshooting the deficit to 9.8 percent in 2009, but the government has already announced a number of reforms in its 2011 budget including a low and simplified tax structure.
"The 2011 budget is generally sound and reflects the government's strong commitment to the program's goals," Shinohara said.
"The proposed tax reforms and reforms of the Board of Investment's tax concession regime should result in a more efficient, transparent, and simpler tax system with a broader base. If implemented properly, these reforms should improve tax compliance and deliver durably higher revenue."
Since the loan approval in July 2009 coupled with the end of a 25-year war, Sri Lanka has been able to turn around its weak macro economic numbers including foreign exchange reserves, inflation, interest rates, and overall growth.
However, foreign direct investment has not picked up as expected despite a strong post-war economic performance, which analysts have attributed to risks involved with inconsistent investment policies.
Economists say the government, despite gaining political stability, wants to implement IMF reforms in a gradual pace, given the political pressure involved with them.
The IMF said that growth had strengthened and inflation was in check despite price pressure from food and energy.
"Going forward, reforms should focus on further strengthening the financial system and expanding funding options for the private sector, including through a deeper corporate bond market and a revamped legal framework for pension funds, Shinohara said.
The loan was originally approved in July 2009 to boost Sri Lanka's weakened foreign reserves, which fell to an eight year low of $1.27 billion in March that year.
The global lender delayed in third tranche for nine months after Sri Lanka failed to adhere IMF's 2009 deficit target of 7 percent. Instead, the island nation deficit hit an eight-year high of 9.8 percent.
(Editing by Bryson Hull and Sanjeev Miglani)
source- in.reuters.com
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