COLOMBO War-battered Sri Lanka may have won a rescue package from the IMF, but the bailout comes at a high price with warnings that the economy would go from "bad to worse" unless unpopular reforms are carried out. The International Monetary Fund's package announced last month allowed Sri Lanka to immediately draw $131 million out of a total standby credit of $253 million, to be used over a period of 14 months, AFP reported. In return, the IMF wants the government to keep to strict budgetary targets with better tax collection and include more goods and services in an unpopular tax bracket. Also demanded are job cuts in the government, pruning of pensions, privatization and a hire-and-fire labor policy, but the politically-suicidal moves are sugar-coated with words such as "rationalization," "reform" and "improvements." Sri Lanka's Central Bank in its latest report has echoed the IMF prescriptions and argued that the country had little choice if it wanted to get out of the present economic crisis. "The economic outlook for 2001 and the medium-term economic prospects ... could change from bad to worse, unless corrective measures are taken without further delay and necessary reforms are implemented consistently and effectively," the bank said. It forecast economic growth this year to be at a slower 4.5 percent, compared to an expansion of 6.0 percent last year and stressed that the country needed a "clear vision." The Central Bank is more explicit in calling for a widening of the tax net, trimming public sector holidays, increasing the prices of diesel, water, electricity and bread. The bank argues that a subsidy on diesel which is commonly used by public transport has encouraged people to import diesel powered vehicles with high-capacity powerful engines. "Only 58 percent of households have access to electricity while 30 percent have water connections, but both electricity and water are provided to households at prices, a part of which is paid for by nonusers or other users," the bank said. Even though the government imposed higher commodity prices on top of sharp increases in the cost of utilities over the past year, there is no guarantee that it will be able to hold down its defense spending. The government is banking on efforts by Norway to broker peace and end the drawn out Tamil separatist conflict, but already the defense budget has overshot the original estimates by nearly two-thirds to hit a billion dollars last year. This year too the government is expecting to spend about the same amount, but any escalation of the conflict could be devastating for the budget. Consumers have already been hit with a rise in the price of diesel, increased by nearly 140 percent since last February. Water, electricity, telephones and transport prices have also shot up by 30 to 50 percent. Imports have risen sharply because of a rapid depreciation of the local currency amid alarmingly falling foreign reserves. The IMF said it was offering the credit to help Sri Lanka rebuild its dwindling foreign exchange reserves and ensure growth. "The program aims to restore macroeconomic stability through an improvement in the financial position of the public sector and the rebuilding of official reserves, supported by a flexible exchange rate," IMF Deputy Managing Director Shigemitsu Sugisaki said last month. The IMF said it expected the government to reduce its 2000 budget deficit which was 9.8 percent of GDP to about 8.5 percent of GDP in 2001 and further reductions to about 5.0 percent in the medium term. Pressed by international lenders on one side and a shortfall in revenue on the other, the Central Bank last week made an appeal for peace to revive the economy. The bank urged all political parties to support a lasting political settlement to a conflict that is estimated to cut two percentage points from the economy's growth. "As the country cannot afford to continue this conflict, all persons and political parties should extend their fullest cooperation to find a lasting solution by addressing its deep-rooted causes," it said.