IMF releases $336 million tranche to Sri Lanka amid 'knife-edged' path to debt sustainability

The IMF has disbursed the third tranche of USD 336 million from its USD 2.9 billion bailout package to Sri Lanka, even as it cautioned that the economy of the cash-strapped nation remains vulnerable and the path to debt sustainability is "knife-edged".

The third tranche under the Extended Fund Facility (EFF) arrangement was released during an executive board meeting of the International Monetary Fund held on Wednesday, the Washington-based global lender said in a statement.

With the release of the third tranche amounting to USD 336 million, the total IMF financial support disbursed so far to Sri Lanka under the bailout package is about USD 1 billion, the statement said.

Two tranches of USD 330 million each were released in March and December 2023.

The IMF noted that Sri Lanka's economy has started recovering, inflation remains low, revenue collection is improving, and reserves continue to accumulate.

However, “despite these positive developments, the economy is still vulnerable and the path to debt sustainability remains knife-edged," it warned.

Strong reform efforts, adequate safeguards, and contingency planning help mitigate these risks, the IMF said.

“To restore fiscal sustainability, sustained revenue mobilisation efforts, promptly finalising the debt restructuring in line with programme targets, and protecting social and capital spending remain critical. Advancing public financial management will help enhance fiscal discipline, and strengthening the debt management framework is also needed," it underlined.

The EFF-supported programme aims to restore Sri Lanka's macroeconomic stability and debt sustainability, mitigate the economic impact on the poor and vulnerable, rebuild external buffers, safeguard financial sector stability, and strengthen governance and growth potential, the IMF said.

The IMF is insistent on Sri Lanka maintaining its reform momentum and action for debt sustainability. It has stressed the swift finalisation of MoUs with creditors, including the Exim Bank of China.

The island nation, in April 2022, declared its first-ever sovereign default since gaining Independence from Britain in 1948. The unprecedented financial crisis led President Ranil Wickremesinghe's predecessor Gotabaya Rajapaksa to quit office in 2022.