IMF provisionally approves USD 2.9 billion loan for crisis-hit Sri Lanka

COLOMBO: Crisis-hit Sri Lanka has reached a preliminary agreement with the International Monetary Fund for a loan of about USD 2.9 billion, the international lender said on Thursday.

Sri Lanka is going through its worst economic crisis since its independence in 1948 which was triggered by a severe paucity of foreign exchange reserves.

“IMF staff and the Sri Lankan authorities have reached a staff-level agreement to support Sri Lanka's economic policies with a 48-month arrangement under the Extended Fund Facility (EFF) of about 2.9 billion US dollars,” the IMF said in a statement.

The objective is to restore macroeconomic stability and debt sustainability while safeguarding financial stability, among other factors, it added.

Sri Lanka started negotiating for the facility in late April after announcing its first-ever international debt default. The government later appointed legal and debt advisors to handle the debt restructuring as prescribed by the IMF.

“Debt relief from Sri Lanka's creditors and additional financing from multilateral partners will be required to help ensure debt sustainability and close financing gaps”, it said.

“Financing assurances to restore debt sustainability from Sri Lanka's official creditors and making a good faith effort to reach a collaborative agreement with private creditors are crucial before the IMF can provide financial support to Sri Lanka,” it added.

The IMF calls for action to raise fiscal revenue by implementing tax reforms, introducing cost recovery-based pricing for fuel and electricity, raising social spending to help the poor and the vulnerable in the ongoing economic crisis, restoring flexible exchange rates, a capitalised banking system and a stronger anti-corruption legal framework.

Sri Lanka, a country of 22 million plunged into a political crisis last month after former President Gotabaya Rajapaksa fled the country following a popular public uprising against his government for mismanaging the economy.

Rajapaksa was replaced by his ally Wickremesinghe, who is also the country's Finance Minister and is leading the talks with the IMF delegation.

The country is also expected to restructure its debt worth USD 29 billion, with Japan expected to coordinate with other creditor nations, including China on this issue.

In mid-April, Sri Lanka declared its international debt default due to the forex crisis. The country owes USD 51 billion in foreign debt, of which USD 28 billion must be paid by 2027.

Sri Lanka's inflation level hit a whopping 64.3 per cent in August, continuing to spike as fuel became expensive.

In its latest assessment, the World Bank has said that Sri Lanka has been ranked 5th with the highest food price inflation in the world.

Sri Lanka is ranked behind Zimbabwe, Venezuela, and Turkey, while Lebanon leads the list.