The IMF says it has reached a preliminary agreement with Sri Lanka on a four-year, $2.9bn bailout package aimed at restoring economic stability and debt sustainability for the crisis-ridden south Asian nation.
The announcement on Thursday, at the end of a week-long IMF mission, offered the first indication of a path out of insolvency for the country of 22mn, which has run out of cash and suffered crippling shortages of fuel and essentials this year. Its former president, Gotabaya Rajapaksa, was driven out of office in July by a popular revolt over rising prices and shortages of fuel and food.
However, the multilateral lender said the staff-level agreement was subject to approval by its management and executive board and contingent on Sri Lanka securing debt relief from creditors and financing from multilateral lenders, as well as undertaking steps to reform its economy and improve governance.
“Because Sri Lanka’s debt is assessed to be unsustainable, debt relief from Sri Lanka’s creditors will be required to assure debt sustainability,” said Peter Breuer, the IMF’s senior mission chief for the country. “Having a path to restore debt sustainability — so-called financing assurances — is necessary for approval by the IMF executive board, and additional financing from multilateral partners will be needed to close financing gaps.”
Sri Lanka this year became the first Asian nation in decades to default on its external debt of $51bn, about half of which is held by private bondholders.
Years of populist economic policies and unsustainable borrowing by Rajapaksa and other government officials left the country unable to pay its loans or import basics including food and medicine. Its currency, the rupee, has depreciated more than 44 per cent against the US dollar since January.
Ranil Wickremesinghe, the new president, had urged the IMF to act quickly. In addition to the top job, he also holds the post of finance minister in a government that took power after Rajapaksa was ousted.
Sri Lanka was scheduled to pay about $8bn in debt and interest this year, according to its finance ministry.
Breuer said the country needed to undertake several “prior actions” before securing the bailout, including setting out a 2023 budget consistent with the IMF programme and gaining financing assurances, including from private creditors.
Masahiro Nozaki, another IMF official, said the government also needed to take measures to fight corruption, including improving fiscal transparency and financial management and introducing a stronger anti-corruption legal framework. It must also improve tax collection and impose higher rates for high-income earners, he added.
“There needs to be a government that has the mandate to carry out the reforms, and there needs to be buy-in by society to support the reforms and to move forward with them,” said Breuer.
Source: Economy - ft.com
