Sri lanka reaches 2.9 bn loan preliminary agreement with IMF

Sri Lanka on Thursday landed a preliminary agreement to obtain $2.9 billion from the International Monetary Fund, a crucial lifeline for the crisis-plagued South Asian country.

Officials from the multilateral lender, however, were quick to caution that this is only the beginning of a long road to recovery. They also made clear that much will depend on the willingness of Sri Lanka’s existing creditors — a list that includes China — to cooperate.

The $2.9 billion bailout, which would be disbursed through a 48-month Extended Fund Facility, is designed to “restore macroeconomic stability and debt sustainability,” the IMF said in a statement.

Peter Breuer, the IMF’s senior mission chief for Sri Lanka, tells reporters about the staff-level agreement in Colombo on Sept. 1. © Reuters

The deal remains contingent upon the approval of the IMF’s executive board “in the period ahead.” That, in turn, will depend “on the implementation by the authorities of prior [reform] actions, and on receiving financing assurances from Sri Lanka’s official creditors and making a good faith effort to reach a collaborative agreement with private creditors.”

Addressing a news conference on Thursday at the Central Bank of Sri Lanka in Colombo, the IMF’s senior mission chief, Peter Breuer, underscored that the real work was still to come. “The authorities have already begun the reforms process and it is important for them to continue on this path with determination,” he said.

For now, Sri Lanka remains caught in an economic maelstrom, unable to pay for sufficient supplies of essentials like fuel and food. The country defaulted on its foreign debt for the first time earlier this year.

Anushka Wijesinha, an economist and co-founder of the Centre for a Smart Future, a Colombo think tank, said the problems had snowballed far beyond a foreign exchange crisis into a macroeconomic one, with swirling risks to growth, employment and the poor.

“These cannot be solved by $2.9 billion,” Wijesinha said. While the program could “help set some of these things right” if implemented successfully, he added that “in Sri Lanka we have a poor track record of implementation.”

Still, the IMF arrangement marks a pivotal moment.

It is a product of intense discussions involving Sri Lankan President Ranil Wickremesinghe, who doubles as finance minister, and other officials. On Tuesday, Wickremesinghe unveiled a budget that appeared to meet at least some of the IMF’s expectations for raising tax revenue, preserving central bank independence and promoting fiscal discipline, according to experts.

On top of restoring stability, Breuer said that the IMF-supported economic program aims to “protect the vulnerable and step-up structural reforms against corruption, and unlock Sri Lanka’s growth potential in the time ahead.” He spoke of how the measures, including efforts to raise government revenue, could provide room for necessary fiscal spending and help rebuild confidence inside and outside Sri Lanka.

Masahiro Nozaki, mission chief for Sri Lanka, explained that the first tranche of funds would come when the IMF board gives the green light. It was not immediately clear how long that would take.

The rest of the money, Nozaki said, would be supplied over the course of the program, with each disbursement tied to successful reviews by the executive board.

All eyes are on the creditors, with the IMF saying that debt relief as well as additional support from other multilateral partners will be needed to ensure debt sustainability and close financing gaps.

Breuer cautioned that if creditors are unwilling to provide assurances in relation to debt restructuring, it will deepen the crisis in Sri Lanka and call repayment capacity into question. A week before the deal, Wickremesinghe told Nikkei Asia that he was pushing China to change its stance on debt relief.

Talal Rafi, a member of the World Economic Forum Expert Network, explained that “now the focus will shift on the stance China takes, as China favors refinancing instead of restructuring debt generally.”

Pointing to an African example, he said: “It took Zambia seven months after its staff-level agreement with the IMF to conclude debt restructuring due to China’s reluctance, but the fact that China has agreed to debt restructuring in Zambia has set a good precedent.”

Japan’s finance minister earlier this week said Tokyo would strive to coordinate with all lenders to help Sri Lanka.

The IMF’s Breuer stressed, “A deepening crisis means the resources to service the debt will become less, so it is really in the interest of all creditors to work with Sri Lanka on this front.” The fund’s backing, he suggested, ought to help that cause.

“The staff-level agreement is a credible device to show creditors that Sri Lanka is serious about engaging in reforms and that they are doing everything that is needed to restore its payment capacity,” Breuer said.

The mission leader also touched on the risk of political turmoil. Sri Lanka’s worsening economic conditions triggered months of protests that ultimately prompted former President Gotabaya Rajapaksa to resign and flee the country. This paved the way for parliament to elect Wickremesinghe as his replacement.

Breuer said Sri Lanka will need a steady government to make progress.

“The political context does matter, and we hope that the regained stability since we were last here in June will endure so that there is an environment in which the difficult economic reforms can in fact be carried out,” he said.

“We are here to help the country and for the country to emerge from the crisis, and for the people to enjoy prosperity going forward.”