IMF reaches staff-level agreement with Sri Lanka for $337 million bailout

The IMF on Thursday said it has reached a staff-level agreement with Sri Lanka for the next phase that would enable it access to USD 337 million from the nearly USD 3 billion bailout approved in 2023 for the cash-strapped country. The International Monetary Fund (IMF) also praised Colombo as it said macroeconomic policy reforms are starting to bear fruit.

Starting March 7, the IMF team comprising Senior Mission Chief Peter Breuer and Deputy Mission Chief Katsiaryna Svirydzenka were conducting, in Colombo, a two-week-long second review of the March 2023 bailout of USD 2.9 billion spanning over four years.

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

“The IMF team reached staff-level agreement with the Sri Lankan authorities on the second review under the economic reform programme supported by a 4-year Extended Fund Facility (EFF) arrangement and concluded the 2024 Article IV Consultation discussions,” a statement from the global lender said in Washington.

The EFF arrangement was approved by the IMF Executive Board for a total amount of SDR 2.3 billion (about USD 3 billion) on March 20, 2023.

“Upon completion of the Executive Board review, Sri Lanka would have access to SDR 254 million (about USD 337 million), bringing the total IMF financial support disbursed under the arrangement to SDR 762 million (about USD 1 billion), the IMF statement said.

Once the review is approved by IMF Management and completed by the IMF Executive Board, Sri Lanka will have access to SDR 254 million (about USD 337 million) in financing.

In April 2022, Sri Lanka 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. Wickremesinghe stepped in to fill in Rajapaksa's remaining term till 2024.

The IMF statement also mentioned the condition for completion of the review by the IMF's Executive Board, which it said, required the implementation by the authorities of prior actions; and the completion of financing assurances review, confirming multilateral partners' financing contributions and assessing adequate progress with debt restructuring.

“Macroeconomic policy reforms are starting to bear fruit. Sustaining the reform momentum and addressing governance weaknesses and corruption vulnerabilities are critical to put the economy on a path towards lasting recovery and stable and inclusive growth,” the statement said.

“The authorities are making good progress in implementing an ambitious reform agenda under the EFF with commendable outcomes,” it said and listed the detailed steps taken by Sri Lanka.

“Programme performance was strong, with all quantitative performance criteria and indicative targets for end-December 2023 met except for the indicative target on social spending. Most structural benchmarks due before end-February 2024 were either met or implemented with delay. Reforms in some areas are still ongoing,” it added.

The IMF also acknowledged that the inflation in Sri Lanka came down from a peak of 70 per cent in September 2022 to 5.9 per cent in February 2024 and that the gross official reserves increased to USD 4.5 billion at end-February 2024 with sizeable foreign exchange purchases by the central bank.

“Sustaining the reform momentum is critical to put the economy on a path towards lasting recovery and stable and inclusive economic growth,” it said and asked for continued monitoring.

The global lender also said that Sri Lanka's Agreements in principle with the Official Creditor Committee and Export-Import Bank of China on debt treatments consistent with programme parameters “were important milestones putting Sri Lanka's debt on the path towards sustainability.” During the two-week review, the IMF mission team met with tea plantation workers in Nuwara Eliya and learned first-hand about some of the challenges Sri Lanka's most vulnerable face. “Continued efforts to improve targeting, adequacy, and coverage of social safety nets, particularly Aswesuma, remain critical to protect the poor and the vulnerable,” the statement added.

The IMF team also held meetings with President and Finance Minister Ranil Wickremesinghe, Central Bank of Sri Lanka Governor Dr P Nandalal Weerasinghe, Minister of Power and Energy Kanchana Wijesekera among others. 

Except for the Tamil National Alliance, the main Tamil party in Sri Lanka, the entire opposition declined to meet the IMF team last week.

The team also met with representatives from the private sector, civil society organisations, and development partners.