The board of the International Monetary Fund (IMF) has approved a $3 billion bailout package for Sri Lanka, aimed at aiding the country in restructuring its debts and alleviating a severe economic and social crisis, which has been described as “catastrophic.”
Earlier this month, the agreement on the bailout, which had been initially agreed upon in principle last September, was finalized after overcoming opposition from China, the largest bilateral lender to the country.
Last year, the country experienced turmoil as a result of Russia’s conflict with Ukraine, which caused a significant increase in inflation and shortages. This situation worsened due to years of mismanagement and policy mistakes.
Consequently, after months of mass street protests that led to the resignation and departure of its former president in July, Sri Lanka requested IMF assistance.
The objective of the deal is to restructure the public debt of $95 billion, which amounts to approximately 130% of GDP and is owed mainly to foreign governments and commercial lenders, such as international and domestic bondholders.
In exchange for the bailout, Sri Lankan officials have agreed to implement extensive fiscal, monetary, and governance reforms to combat corruption and enhance tax revenues.
IMF Managing Director Kristalina Georgieva emphasized the importance of “swift and timely implementation” of the IMF program, along with “strong ownership” of the agreed reforms between IMF staff and Sri Lankan authorities, in order to overcome the crisis.
Sri Lanka is set to receive one immediate and eight subsequent disbursements, each worth approximately $333 million throughout the four-year IMF program, with payouts contingent on Sri Lanka fulfilling the program’s conditions.
The first condition is an agreement with its creditors regarding the restructuring of its public debts. Although the IMF usually expects this to be largely completed before the first six-month review, the complexity of Sri Lanka’s debts suggests that reaching an agreement with all creditors may take 18 months, according to Financial Times.
Nonetheless, a preliminary agreement with bilateral lenders is believed to be sufficient to trigger the release of the second tranche.
The reforms include efforts to combat corruption and inefficiencies at state-owned enterprises, address inflation and rebuild foreign currency reserves, recapitalize the banking sector, and revamp the tax system, which currently sees less than 5% of the country’s taxpayers paying half of their income to the state.
China has agreed to join India and Japan, as well as other bilateral creditors, in supporting the deal.