Home/ Economy / Sri Lanka gets $3 billion IMF loan to help ease economic crisis

The International Monetary Fund approved a $3 billion loan program for Sri Lanka, a crucial step for the bankrupt nation to stabilize its economy and begin restructuring its debt. 

The lender’s executive board approved the 48-month program in Washington on Monday, and said it will include an immediate disbursement of about $333 million. 

“Sri Lanka has been hit hard by a catastrophic economic and humanitarian crisis," the IMF said in a statement. “The economy is facing significant challenges stemming from pre-existing vulnerabilities and policy missteps in the lead up to the crisis, further aggravated by a series of external shocks."

The bailout will inject much-needed funding for a nation grappling with soaring prices, supply shortages and eroded foreign-currency reserves after defaulting on its overseas debt last year. 

The focus will turn next to debt talks, which Fitch Ratings has said may drag on as creditors debate whether to include local-currency sovereign borrowing in the restructuring. The rating company cut its score on rupee debt in December, saying a default was probable.

Sri Lanka’s dollar bonds due in 2030 fell for a third straight session to about 35 cents, according to indicative price data compiled by Bloomberg. The debt was little changed from immediately before the IMF announcement.

“It’s been a long road but thanks to everyone’s hard work and dedication, we’re well on our way towards better days," Foreign Minister Ali Sabry said in a tweet Monday. The country’s president, Ranil Wickremesinghe, also posted: “We are committed to full transparency in our efforts to achieve sustainable levels of debt and our reform agenda. The IMF program is critical to achieving this vision."

The development comes at a time when debt-relief talks for other vulnerable nations such as Zambia have stalled. The main sticking point for talks on several fronts has been a disagreement between China, the biggest creditor to emerging economies, and traditional lenders led by the US on whether loans from multilateral institutions like the World Bank can be restructured. 

“Close collaboration between Sri Lanka and all its creditors will be critical to expedite a debt treatment that will restore debt sustainability consistent with program parameters," the IMF said in its statement. 

Sri Lanka defaulted on its overseas debt for the first time in May last year and suspended all outstanding payments to bond holders and bilateral creditors. Sri Lanka has a long track record with the IMF. It secured 16 bailouts since the 1960s with the last one in 2016. 

While shortages have eased, inflation has somewhat cooled and reserves have inched up to $2.2 billion in February, the nation needs the IMF loan to turn the corner after falling into a deep recession in 2022.

Since the IMF’s staff-level agreement in September, Sri Lanka has increased taxes, cut energy subsidies and returned to a more flexible exchange-rate regime to meet conditions set by the Washington-based lender. The nation also increased borrowing costs to the most since August 2001 to rein in Asia’s fastest inflation. 

Some of those changes have raised concerns. Several civil society organizations on Monday sent a joint letter to the IMF detailing their worries over the impact of austerity moves on the population, as well as calling for greater transparency in how the funds will be disbursed.

Sri Lanka’s private creditors are considering a proposal to swap defaulted bonds with new securities that would have cash flow linked to the nation’s future growth, according to people familiar with the matter.

Authorities had originally anticipated a board approval by the end of 2022, but later readjusted their expectations amid delays in creditor assurances. Earlier this month, China — Sri Lanka’s biggest bilateral creditor — backed the nation’s debt recast efforts after India and the Paris Club provided their support.

Disbursements by the Washington-based lender are usually spread across the duration of the program and tied to reviews, while an initial amount is released subsequent to board approval.


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Updated: 21 Mar 2023, 01:59 AM IST
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