May 21 (Bloomberg) -- Sri Lanka’s rating outlook was cut to negative from stable by Standard & Poor’s because of depleting foreign-exchange reserves and delays in receiving a bailout from the International Monetary Fund.

“The underlying pressures on Sri Lanka’s external liquidity position have intensified,” said S&P, which rates the island’s long-term foreign currency debt at ‘B’, five levels below the investment grade.

Sri Lanka started talks with the IMF in March for a $1.9 billion bailout after its foreign reserves declined by more than half since September to $1.4 billion. The timing and implementation of the IMF loan is “uncertain,” the rating company said today, adding that the military defeat of Tamil Tiger rebels this month won’t “alleviate” the reserves problem.

The Central Bank of Sri Lanka said on April 30 that its agreement with the IMF is at an “advanced level of finalization.”

“An IMF agreement remain essential to avoiding potential external payment difficulties,” S&P said.

The island nation has to repay $900 million of debt in 2009 and can’t replenish its reserves because the global economic downturn hurts its exports.

S&P said the government must also undertake steps to expand revenue and cut expenditure to trim the budget deficit and reduce debt.

Budget Deficit

Sri Lanka’s budget deficit stood at 8 percent of gross domestic product in 2008. The nation’s revenue is growing at 14.6 percent against a 23.2 percent growth in nominal growth in GDP, which “underscores” weak revenue generation. The nation’s public debt makes up 81 percent of the economy, the rating company said.

Sri Lanka is betting faster economic growth after the end of its 26-year civil war will boost tax revenues.

“We could be looking at something like 4 percent to 5 percent growth on the basis of war coming to an early end,” central bank Governor Nivard Cabraal told Bloomberg Television in an interview earlier today. The bank in April predicted the $32 billion economy would grow 2.5 percent, the least since 2001.

Cabraal today cut the reverse repurchase rate to 11.5 percent from 11.75 percent to give a fillip to an economy ravaged by the global recession and war, boosting share prices.

President Mahinda Rajapaksa is also seeking international assistance to rebuild the nation after the army crushed the Liberation Tigers of Tamil Eelam this month.

To contact the reporter on this story: Cherian Thomas in New Delhi at Cthomas1@bloomberg.net.

Last Updated: May 21, 2009 06:40 EDT