The International Monetary Fund (IMF), on March 21, approved a near $3 billion bailout for crisis-stricken Sri Lanka as part of a programme to "restore macroeconomic stability and debt sustainability, safeguarding financial stability, and stepping up structural reforms".
The four-year extended arrangement under the IMF's Extended Fund Facility (EFF), worth 2.286 billion Special Drawing Rights - or about $3 billion - will see about $330 million being disbursed immediately. The IMF said that this disbursal is expected to result in new external financing, including that from the World Bank and the Asian Development Bank.
Read More: What will happen if Pakistan defaults on its debt?
"Sri Lanka has been facing tremendous economic and social challenges with a severe recession amid high inflation, depleted reserves, an unsustainable public debt, and heightened financial sector vulnerabilities," said Kristalina Georgieva, the IMF's managing director.
"Institutions and governance frameworks require deep reforms. For Sri Lanka to overcome the crisis, swift and timely implementation of the EFF-supported program with strong ownership for the reforms is critical," Georgieva added.
Prime Minister Ranil Wickremesinghe thanked the IMF for approving Sri Lanka's request for the extended programme under the EFF.
"We are committed to full transparency in our efforts to achieve sustainable levels of debt and our reform agenda. The IMF programme is critical to achieving this vision," Wickremesinghe added.
The multilateral agency noted that its porgramme prioritised an "ambitious" fiscal consolidation along with stronger social safety nets, fiscal institutional reforms, and cost-recovery based energy pricing. Further, public debt sustainability had to be restored, including through a debt restructuring.
A third pillar is to restore price stability and rebuild reserves under greater exchange rate flexibility to lift the burden of inflation. Finally, policies to ensure the financial sector can play a key role in supporting economic growth will also be at the forefront along with structural reforms to address corruption vulnerabilities and enhance growth.
However, the IMF noted that risks to the implementation of the programme are "exceptionally high" due to the complex debt restructuring process, the unfavorable external environment, elevated risks of persistently high inflation, and the challenging domestic political and social situation.
"Given Sri Lanka's weak track record of reform implementation, the program runs significant risks of slippages regarding fiscal consolidation, revenue mobilisation, and reserves buildup. A deeper crisis induced by a further economic fallout, the weakened banking sector, exchange rate pressure, and loss of market confidence could also complicate program
implementation," IMF staff said in a report, which was completed on March 6.
The debt vulnerability of Sri Lanka, among other countries, has featured in the G20 discussions in recent months, with the Chair's Summary and Outcome Document published at the end of the first meeting of the bloc's finance ministers and central bank governors in Bengaluru last month calling for a "swift resolution".
China and India are two of Sri Lanka's largest creditors.
Peter Breuer and Masahiro Nozaki, Senior Mission Chief and Mission Chief for Sri Lanka, respectively, said on March 21 that the IMF had received assurances from official bilateral creditors that they would provide debt relief and/or financing to restore debt sustainability consistent with the programme in addition to authorities making good faith efforts to
reach an agreement with private creditors.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
