COLOMBO: Sri Lanka has reached a staff-level agreement with the International Monetary Fund for a $2.9 billion loan, the global lender said on Thursday, as the island country struggles to find a way out of its worst economic crisis in memory.
Sri Lankans have for months faced severe shortages of fuel and other basic goods, as the country’s dwindling foreign reserves left it unable to pay for essential imports. It suspended repayments on its $51 billion foreign loans in April and has since been in talks with the IMF for a bailout program.
The financial turmoil had led to unprecedented protests that culminated in a change in the government, with the new cabinet now responsible for finding a way out of the crisis as inflation surged to a record 64.3 percent in August.
The agreement announced on Thursday would support Sri Lankan authorities’ economic adjustment and reform policies, the IMF said, but only marks the beginning for the debt-stricken nation.
“This staff-level agreement is only the beginning of a long road for Sri Lanka to emerge from the crisis,” senior IMF official Peter Breuer told reporters in Colombo.
“In this context, the authorities have already begun the reform process, and it will be important to continue on this path with determination.”
The Extended Fund Facility arrangement will support Sri Lanka’s program to restore macroeconomic stability and debt sustainability, the IMF said in a statement, though the 48-month program is still subject to approval by the IMF management and its executive board.
The deal is also conditioned on Sri Lankan authorities engaging with creditors like Japan, China and India to restructure its huge foreign debt.
The IMF program is also aimed at boosting government revenue, encouraging fiscal consolidation, introducing new pricing for fuel and electricity, hiking social spending, bolstering central bank autonomy and rebuilding depleted foreign reserves, which stood at $1.82 billion as of July, according to central bank data.
“Starting from one of the lowest revenue levels in the world, the program will implement major tax reforms,” the IMF said, adding that the reforms would include making personal income tax more progressive and broadening the tax base for corporate income tax and VAT.
“The program aims to reach a primary surplus of 2.3 percent of GDP by 2024.”
Sri Lanka’s debt crisis stems from the COVID-19 pandemic’s impact on its key tourism industry and economic mismanagement under former President Gotabaya Rajapaksa, who dominated Sri Lankan politics for much of the past two decades but was ousted in July after a popular uprising against him and his family.
S. A. Azeez, a chartered accountant and management consultant, said the government must “focus on expediting measures needed to reach a final agreement with the IMF.”
“Dealing with bilateral lenders is going to be a thorny issue. A high level of diplomatic maneuvering will be needed to achieve some deal with these lenders,” he said.
