Sri Lanka’s president has said the International Monetary Fund (IMF) has approved its request for a $2.9 billion bailout and the country’s presidency said the program will enable it to access $ 7 billion in total financing.
The IMF Board confirmed it has signed the loan, which paves the way for the release of funds and kicks off a four-year program designed to support the country’s economy.
The decision will allow for an immediate disbursement of about $333 million, the IMF said, and will boost financial support from other partners, potentially helping Sri Lanka emerge from its worst financial crisis in decades.
But IMF director Kristalina Georgieva warned that Colombo must continue to push for tax reform and larger social safety nets for the poor – and curb corruption partly attributed to the crisis.
“I express my gratitude to the IMF and our international partners for their support as we strive to put the economy back on track for the long term through prudent fiscal management and our ambitious reform agenda,” said Sri Lankan President Ranil Wickremesinghe, in a statement on Monday.
The country defaulted on its external debt in April 2022 as a major shortfall in foreign exchange reserves sent it into its worst economic downturn since independence.
The Indian Ocean country of about 22 million people ran out of money to finance even the most essential imports, leading to widespread social unrest.
Mass protests over economic mismanagement, acute shortages of food, fuel and medicine and runaway inflation forced President Gotabaya Rajapaksa to flee the country and resign in July.
Rajapaksa was replaced by President Wickremesinghe, who has implemented major spending cuts and tax hikes in a bid to secure IMF support.
IMF staff had tentatively approved the bailout in September, but the final green light was delayed until China, the island’s largest bilateral lender, agreed to restructure its loans to Colombo.
Beijing had said this year it was offering a two-year moratorium on its loans to Sri Lanka, but the concession fell short of the IMF’s expectations for the island’s debt sustainability.
Wickremesinghe had said after China agreed to restructure its loans that he expected the first tranche of the IMF package to become available within the month.
Earlier on Monday, Wickremesinghe’s office said it was seeking a 10-year moratorium on Sri Lanka’s foreign debt as the country ran out of foreign reserves to service its loans.
Officials involved in the negotiations said the terms of the debt restructuring must be finalized and approved by all parties before June, when the IMF is expected to review the bailout program.
Wickremesinghe’s office said in a statement that the IMF program will help improve the country’s position in international capital markets, making it attractive to investors and tourists.
Wickremesinghe previously told the country’s parliament that there were signs the economy was improving, but there was still not enough foreign exchange for all imports, making the IMF deal crucial so that other creditors could also free up money.
Call to tackle corruption
Colombo is also counting on the IMF deal to release billions of dollars in foreign aid for projects that have been suspended since Sri Lanka defaulted on its loans last year.
The government has already doubled taxes, tripled energy rates and cut subsidies in an effort to meet the terms of the IMF’s bailout.
The austerity measures also led to strikes in the health and logistics sectors last week. Wickremesinghe has said he had no choice but to join an IMF program.
Georgieva said Sri Lanka should stick to its controversial tax reforms, control government spending and abolish energy subsidies.
In a statement, she said that “the momentum of ongoing progressive tax reforms should be maintained and social safety nets should be strengthened and better targeted at the poor”.
She also urged Colombo to tackle endemic corruption.
“A more comprehensive anti-corruption reform agenda should be led by the ongoing IMF governance diagnostics mission, which is conducting an assessment of Sri Lanka’s anti-corruption and governance framework,” she said.
Sri Lanka’s economy shrank a record 7.8 percent last year as it struggled with its largest foreign exchange deficit since independence from Britain in 1948.
