The International Monetary Fund has preliminarily agreed to extend a 48-month $2.9 billion loan to Sri Lanka to help restore economic stability to the crisis-hit South Asian country.
The loan will be made under the IMF’s Extended Fund Facility, which helps countries deal with balance of payments or cash flow problems.
“Sri Lanka has been facing an acute crisis. Vulnerabilities have grown owing to inadequate external buffers and an unsustainable public debt dynamic,” the IMF’s Peter Breuer and Masahiro Nozak, who led a mission to Sri Lanka in the past week, said in a press release.
“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.”
The IMF said Sri Lanka’s economy is expected to contract by 8.7% this year as inflation soars above 60%.
“The impact has been disproportionately borne by the poor and vulnerable,” the IMF said, adding 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 said the new loan is subject to approval by IMF management and the Executive Board.
It is also contingent on the IMF receiving financing assurances from Sri Lanka’s official creditors to restore debt sustainability and local authorities making good faith efforts to reach a collaborative agreement with private creditors.
“Debt relief from Sri Lanka’s creditors and additional financing from multilateral partners will be required to help ensure debt sustainability and close financing gaps,” Breuer and Nozak said.
The loan program includes helping Sri Lanka raise fiscal revenue and implement major tax reforms, including more progressive taxation and broader corporate and VAT taxes.
It aims to help the Sri Lankan government reach a fiscal surplus of 2.3% of GDP by 2024. It has a projected 2022 deficit of 9.8% of GDP.
The IMF will also help the country — where inflation hit 64.3% last month — restore price stability through data-driven monetary policy action as well as stronger autonomy for the central bank. This would require a new Central Bank Act, the IMF said.
There will also be plans for both parties to mitigate the impact of the crisis on the poor and vulnerable by raising social spending as well as to reduce corruption.
Source: CNBC