Virendra Pandit
New Delhi: After months of political and economic turmoil and shortages, cash-strapped Sri Lanka has reached a preliminary agreement with the International Monetary Fund (IMF) for a USD 2.9 billion bailout package, on the condition that Colombo must successfully restructure its foreign debt.
According to the media reports, the IMF has reached a staff-level agreement with Colombo, in a first step before extending the USD 2.9 billion loan package that the Fund has made contingent on assurances from the island nation’s creditors.
“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 USD 2.9 billion,” a visiting IMF team said on Thursday.
This year, Sri Lanka’s headline inflation soared to 64.3 percent in August, while food inflation rose to 93.7 percent. As the crisis worsened, at least six million people, or about 30 percent of the island nation’s population, became food insecure, according to the World Food Programme (WFP).
Reacting to the development, President Ranil Wickremesinghe termed the staff-level agreement “an important step in the history of Sri Lanka.” “The beginning will be difficult, but we know as we go on that we can make more progress,” he said in a statement.
The objectives of the new program — Sri Lanka’s 17th with the Fund so far — are “to restore macroeconomic stability and debt sustainability, while safeguarding financial stability, protecting the vulnerable, and stepping up structural reforms to address corruption vulnerabilities and unlock Sri Lanka’s growth potential,” the IMF said, as it laid out expectations that Colombo must meet before the global lender could approve the program.
“Prior actions” on Sri Lanka’s part include raising fiscal revenue through a “more progressive” income tax regime, rebuilding foreign reserves, and increasing social spending. Significantly, Sri Lanka, which opted for a pre-emptive sovereign default on its USD 51 billion foreign debt in April, must work to obtain debt relief from its creditors and additional financing from multilateral partners “to help ensure debt sustainability and close financing gaps,” the Fund said in its statement.
“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.”
Among Sri Lanka’s chief creditors are the international sovereign bondholders, to whom the island owes the largest chunk of its foreign debt, multilateral agencies, and bilateral lenders — mainly China, Japan, and India.
Recently, President Wickremesinghe said Sri Lanka had conveyed to China the need for debt restructure and for “all the creditors to sing from the same hymn sheet.” He also sought Japan’s help in negotiating with Sri Lanka’s other creditors.
Prior to the nearly USD 4 billion that India extended to the island nation this year in the crisis’s wake, Colombo owed about USD 960 million to New Delhi.
Earlier this year, Sri Lanka, battling the worst economic crisis in its history, had plunged into unprecedented turmoil, with an acute shortage of essentials, including fuel and medicine, sparking massive protests, which forced Gotabaya Rajapaksa to flee the country and resign as President. Ranil Wickremesinghe succeeded him.
Experts said the preliminary agreement with the IMF, under which Sri Lanka could receive USD 2.9 billion to tackle the ongoing economic crisis, is a “first step” in the long haul of economic recovery. Colombo is now expecting other countries to offer help.