March 30, 2023

The IMF says it has reached a preliminary agreement with Sri Lanka on a four-year $2.9 billion bailout aimed at restoring economic stability and debt sustainability for the crisis-ravaged South Asian country.

The announcement on Thursday, at the end of a week-long IMF mission, provided the first indication of a way out of insolvency for the $22 million country, which is out of cash and facing a crippling shortage of fuel and supplies this year. . The former president, Gotabaya Rajapaksa, was removed from office in July over a popular uprising over rising prices and shortages of fuel and food.

However, the multilateral lender said the staff-level agreement is subject to management and board approval and relies on Sri Lanka to ensure debt relief from creditors and financing from multilateral lenders, as well as to take steps to reform its economy and improve governance.

“As Sri Lanka’s debt is considered unsustainable, debt relief from Sri Lanka’s creditors will be needed to ensure debt sustainability,” said Peter Breuer, the IMF’s senior mission head for the country. “Having a path to restore debt sustainability — so-called financing guarantees — is necessary for approval by the IMF board, and additional funding from multilateral partners will be needed to close financing gaps.”

Sri Lanka this year became the first Asian country in decades to default on its $51 billion foreign debt, about half of which is held by private bondholders.

Years of populist economic policies and unsustainable loans by Rajapaksa and other government officials left the country unable to pay its loans or import basic necessities, including food and medicine. The currency, the rupee, has fallen more than 44 percent against the US dollar since January.

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Ranil Wickremesinghe, the new president, had urged the IMF to act quickly. In addition to the top position, he also holds the position of finance minister in a government that came to power after Rajapaksa was ousted.

According to the Ministry of Finance, Sri Lanka would pay about $8 billion in debt and interest this year.

Breuer said the country had to take several “preliminary actions” before the rescue package was secure, including preparing a 2023 budget in line with the IMF program and obtaining funding guarantees, including from private creditors.

Masahiro Nozaki, another IMF official, said the government should also take measures to fight corruption, including improving tax transparency and financial management and introducing a stronger anti-corruption legal framework. It should also improve tax collection and impose higher rates on high-income earners, he added.

“There must be a government that has the mandate to implement the reforms, and there must be a support from society to support the reforms and move forward,” Breuer said.