To help Sri Lanka recover from its economic crisis and regain economic stability, the International Monetary Fund has tentatively agreed to provide a $2.9 billion loan for 48 months to that nation in South Asia.
The loan will be provided through the IMF’s Extended Fund Facility, which aids nations with their cash flow or balance of payments issues. It won’t be given out until an agreement has been reached between the Sri Lankan government and the nation’s creditors about a sufficient debt restructuring plan, including debt relief.
Sri Lankan reforms to lower corruption and raise financial transparency are also part of the program.
“Sri Lanka has been facing an acute crisis. Vulnerabilities have grown owing to inadequate external buffers and an unsustainable public debt dynamic,” in a news statement, Peter Breuer and Masahiro Nozak of the IMF stated that they recently led a mission to Sri Lanka.
“The April debt moratorium led to Sri Lanka defaulting on its external obligations, and a critically low level of foreign reserves has hampered the import of essential goods, including fuel, further impeding economic activity.”
According to the IMF, as inflation surges above 60%, Sri Lanka’s economy is predicted to decline by 8.7% this year.
“The impact has been disproportionately borne by the poor and vulnerable,” Breuer and Nozak of the IMF stated that the funds “aim to stabilize the economy, protect the livelihoods of the Sri Lankan people, and prepare the ground for economic recovery and promoting sustainable and inclusive growth.”
The IMF stated that the executive board and management of the IMF must approve the new loan. Additionally, it stated that the loan could not be approved until the Sri Lankan government had successfully completed a debt restructure, including debt relief agreements with external creditors.
As a result, it is dependent on the IMF securing finance guarantees from Sri Lanka’s formal creditors that agreements have been struck and Sri Lanka will be able to pay back its loans. A collaborative deal with all other private creditors must have been attempted by local authorities in a good faith manner, according to the IMF.
According to the national bank of Sri Lanka, the country owes the World Bank, as well as nations like Japan and China, more than $50 billion in foreign debt.
Breuer stated at a news conference on Thursday that the preliminary agreement is an indication from the Sri Lankan government that they are committed to broad reforms that would be overseen by the IMF.
“This is a credible device to show creditors that Sri Lanka is serious in engaging in reforms,” Breuer said.
“It is assuring creditors that it will restore payment capacity and is committed to do so, to the international committee.”
Breuer encouraged creditors to work with Sri Lanka on negotiations as any delays could cause the IMF’s money to be held up and worsen the island nation’s financial predicament.
The first set of cash will be paid upon IMF approval, and further disbursements will be provided over the IMF’s EEF program periods, according to Nozak. Each round of payments will be preceded by a review.
The loan package also entails assisting Sri Lanka in implementing significant tax reforms, such as more progressive taxation, broader corporate and VAT taxes, and raising fiscal income.
By 2024, it is intended to assist Sri Lanka’s government in achieving a budget surplus of 2.3% of GDP. A 9.8% of GDP deficit is expected in 2022.
Nozak stated that while Sri Lanka’s tax collection was extremely low, any new taxes that were collected had to come from high-income earners in order to protect the weak and vulnerable.
Inflation in the nation, which reached 64.3% last month, would be brought under control by the IMF through data-driven monetary policy decisions and more central bank authority. According to the IMF, this would necessitate a new Central Bank Act.