The International Monetary Fund said on Tuesday it had approved the disbursement of the delayed third tranche of a $2.6 billion loan to Sri Lanka.

The global lender in February had delayed the third tranche after the government missed its 2009 deficit reduction targets and said that domestic budget borrowing -- consistent with a deficit target of 7 percent of gross domestic product -- was exceeded by a substantial amount.

Overall economic conditions in Sri Lanka are improving and the economy is likely to show strong growth this year, Naoyuki Shinohara, Deputy Managing Director and Acting Chair, said in a statement after the Fund's Executive Board completed a second and third reviews of Sri Lanka's economic performance.

The IMF said completion of the reviews allowed for the immediate disbursement of an amount equivalent to SDR 275.6 million (about US $407.8 million).

Government data showed that the $42 billion economy in the first quarter of 2010 grew 7.1 percent from a year earlier, picking up from annual growth of 6.2 percent in the fourth quarter last year.

Both the central bank and the government expect the economy to grow 7 percent this year, up from an eight-year low of 3.5 percent in 2009, as low interest rates encourage more business activity.

But the central bank had earlier said that Indian ocean island nation had likely missed 2009 budget deficit goal of 7 percent set by the IMF as a condition for the loan.

Sri Lanka's poll delayed budget for 2010 is to be presented to Parliament later Tuesday and a budget document showed Sri Lankan government expenditure for 2010 is estimated at 1.78 trillion rupees, up 1.9 percent from a year ago.

Despite the weaker-than-programed 2009 fiscal performance, the government's 2010 budget proposal, if carried out, would significantly address past fiscal slippages, Shinohara said.

The global lender also said that its Executive Board also approved a request by the government to extend the loan's Stand-By Arrangement by another one year and rephrasing of the future disbursements into seven equal amounts of SDR 137.8 million (about US$203.9 million) in light of the recent delay in the program.

The remaining loan of around $2 billion and earlier was planned to disbursed by five equal amounts considering the island nation's commitment to the IMF targets.

The $2.6 billion loan was granted to Sri Lanka in July last year to avert a balance of payment crisis following the global economic crisis on condition that it get its spending under control.

The loan has helped to stabilize the rupee and boost global investor confidence in post-war Sri Lankan government securities and the stock market.

(Additional reporting by Shihar Aneez; Editing by Ron Popeski)