Sri Lanka's reserves may hit record this year

COLOMBO, Aug 17 (Reuters) - Sri Lanka's foreign reserves could return to last year's record highs with inflows from an IMF loan and a planned sovereign bond, the central bank said on Monday.

The Indian Ocean island nation had originally targeted reserves of $2 billion by the end of 2009, but said $3.5 billion or more is now a feasible goal.

"With the IMF money, we will have more than $3 billion easily," Nandalal Weerasinghe, the central bank's assistant governor, told Reuters, referring to the first two tranches of a $2.6 billion International Monetary Fund loan due this year.

After inflows from a new $500 million sovereign bond planned for issue in late September or early October, Weerasinghe said the totals "would be the highest ever reserves".

The country had record high reserves of $3.56 billion by the end of July last year, pushed up by foreign purchases of government securities that were yielding over 17 percent.

But by year's end, reserves had plummeted by half with the central bank defending the rupee against depreciation and the withdrawal of more than $600 million when investors cashed in government securities as the global financial markets crashed.

Those factors prompted Sri Lanka to reverse political course and pursue IMF assistance. The first two tranches, out of a total of eight over the 20-month programme, will total $644.4 million.

"It would be preferable if they could show the reserves excluding the borrowings," said Danushka Samarasinghe, head of research at Asia Securities. "It's the borrowing that shows a bump up in the bank's book."

Sri Lanka wants a low yield on its sovereign bond -- around 7 percent -- but analysts say the remaining tightness in the credit market and its rating could make that difficult.

Rating agency Fitch cut its outlook on Sri Lanka's B-plus rating to negative from stable in February, while Standard & Poor's cut the outlook to negative from stable soon on its B rating soon after a 25-year civil war ended in May.

"We are considering going with some other rating agencies," Weerasinghe said. The central bank has criticised the two big agencies that follow it, saying they have not reassessed post-war prospects.