Sri Lanka and IMF reach preliminary agreement on $2.9 billion loan

Protesters seen here gathering outside the presidential secretariat in Colombo a week ago have achieved their goal, with lawmakers soon to elect a new president to replace Gotabaya Rajapaksa, who fled the country and resigned as president.

Arun Sankar | AFP | Getty Images

The International Monetary Fund has agreed on a preliminary basis to extend $2.9 billion loan over 48 months in Sri Lanka to help restore economic stability in the crisis-hit South Asian country.

The loan will be granted under the aegis of the IMF Extended Fund Facility, which helps countries deal with balance of payments or cash flow problems. It will only be disbursed after satisfactory debt restructuring, including debt relief agreements, between the Sri Lankan authorities and the country’s creditors.

The program also includes reforms for Sri Lanka to reduce corruption and increase financial transparency.

“Sri Lanka faces an acute crisis. Vulnerabilities have increased due to insufficient external reserves and unsustainable public debt dynamics,” Peter Breuer and Masahiro Nozak of the IMF said in a press release. who led a mission to Sri Lanka last week. Release.

“April’s debt moratorium caused Sri Lanka to default on its external obligations, and an extremely low level of foreign exchange reserves hampered the importation of essential goods, including fuel, further hampering economic activity. “.

The IMF said Sri Lanka’s economy is expected to contract by 8.7% this year as inflation tops 60%.

“The impact has been borne disproportionately by the poor and vulnerable,” said the IMF’s Breuer and Nozak, adding that the funds “are aimed at stabilizing the economy, protecting the livelihoods of the Sri Lankan people and to prepare the ground for economic recovery and the promotion of sustainable development”. and inclusive growth.

The IMF said the new loan is subject to IMF management and board approval. He also said the loan can only be granted if the Sri Lankan authorities have carried out satisfactory debt restructuring, including debt relief agreements with external creditors.

The IMF must therefore receive assurances of financing from Sri Lanka’s official creditors in order for agreements to be concluded and for Sri Lanka to be able to repay its debts. The IMF must also be satisfied that the local authorities have made good faith efforts to reach a collaborative agreement with all other private creditors.

Sri Lanka has over $50 billion in foreign debt owed to countries like Japan and China as well as the World Bank, according to the central bank of Sri Lanka.

At a press conference on Thursday, Breuer said the preliminary agreement is a signal from the Sri Lankan authorities that they are committed to comprehensive reforms that would be monitored by the IMF.

“This is a credible device to show creditors that Sri Lanka is committed to reform,” Breuer said.

“He assures creditors that he will restore the ability to pay and undertakes to do so, at the international committee.”

Sri Lankan stock exchange president predicts four to five months of additional hardship

Breuer urged creditors to work with Sri Lanka on negotiations because delays in talks can block the disbursement of IMF funds and deepen the crisis in the island nation.

If approved by the IMF, the funds from the first batch will be released upon approval, with subsequent disbursements being made during periods of the IMF’s EEF program, Nozak said. A review will precede each round of payments.

The loan program also plans to help Sri Lanka increase tax revenue and implement major tax reforms, including more progressive taxation and broader corporate taxes and VAT.

It aims to help the Sri Lankan government achieve a budget surplus of 2.3% of GDP by 2024. It projects a deficit of 9.8% of GDP in 2022.

Nozak said tax collection in Sri Lanka was very low, but new taxes collected must come from high-income people so that the poor and vulnerable are not affected.

The IMF will also help the country – where inflation hit 64.3% last month – restore price stability through data-driven monetary policy action as well as greater central bank autonomy. . This would require a new Central Bank law, the IMF said.

Comments are closed.