Sri Lanka - 2000 Article IV Consultation and Request for a Stand-By Arrangement -- Staff Report; Public Information Notice; And Press Release on the Executive Board (Electronic book text)

1. Nature of the shock. Years of lax fiscal policy forced the government to rely increasingly on short-term financing from international markets. The global financial shock resulted in a sudden stop to this financing and in capital outflows. In an effort to keep the exchange rate from depreciating the central bank had until recently intervened heavily in the foreign exchange market, with reserves reaching dangerously low levels. The loss of competitiveness and a sharp fall in demand for Sri Lankan exports are likely to put additional pressure on reserves, increasing the balance of payments gap further. Despite a rebound in short-term capital inflows following the end of the conflict with the LTTE, reserves remain low and foreign exchange needs significant.