(Adds quotes, reaction)
By Shihar Aneez and Bryson Hull
COLOMBO, March 4 (Reuters) -- Sri Lanka's central bank on Wednesday said it was negotiating a $1.9 billion loan with the International Monetary Fund to help weather the global financial crisis and pay for post-war reconstruction.
Sri Lanka's $32 billion economy has been under pressure because of shrinking export earnings from tea and garments, and foreign currency reserves dropped by half in the last four months of 2008 as the central bank defended the rupee.
Analysts said the move would help investor sentiment and was essentially the only option left for Sri Lanka after all other efforts failed to bring in enough currency to bolster its reserves. [ID:nCOL394407]
"In response to an offer of the IMF to support Sri Lanka during the current global financial crisis, the Government of Sri Lanka has sought a stand-by arrangement from the IMF ... which amounts to approximately $1.9 billion," the central bank said in a statement.
Central bank Governor Ajith Nivard Cabraal declined to say what terms the IMF was asking in exchange for the aid.
He said he did not expect the IMF would bar the government
from spending money to support the rupee
"We are quite confident that things will stabilise and there will be no need for that," Cabraal told Reuters. "Once we have the reserves, the currency will probably stabilise itself because there will be no room for speculators."
Since the reserves began to fall last year, the central bank has said it would not go to the IMF if the international lender of last resort tried to impose conditions that would change Sri Lanka's economic policies.
But on Monday, Cabraal said the IMF this time was being more flexible than it had ever been and that Sri Lanka, in light of that, was examining what it had to offer.
"The move is good," said Murray Fernandezs, treasury manager
at Sri Lanka's NDB Bank
Soldiers are close to defeating the Tamil Tiger rebels after a 25-year separatist conflict, and President Mahinda Rajapaksa has pledged major reconstruction efforts in the northern and eastern parts of the country hit by the war.
"This is an essential expenditure, not only to uplift the living standards of people in the areas affected by the decades-long conflict, but also to successfully implement the government's efforts to bring a sustainable solution," the central bank said.
Sri Lanka has been banking on donor money to finance much of the massive cost for rebuilding, while seeking other commercial loans that had grown more costly and finally went out of reach after global credit dried up.
The central bank said reconstruction would "almost certainly yield enormous economic and social benefits by way of rapid expansion of the domestic economy, mainly in the agriculture and fisheries sectors, as well as...revival of the tourism industry".
Gross official reserves at the end of December were $1.75 billion, or six weeks of import cover, and the central bank acknowledged that it had a balance of payments deficit for the first time in four years.
The central bank said it expects the negotiations to be completed by the end of March, and that a significant portion of the funds will be disbursed up front. (Writing by Bryson Hull; Editing by Toby Chopra)