IMF extends $336 mn to Lanka amid 'knife-edged' path to debt sustainability

Sri Lanka and the IMF have reached a crucial staff-level agreement to release the second tranche of about $330 million out of the $2.9 billion bailout package which will help in the cash-strapped country's economic recovery.

The International Monetary Fund in March this year approved a 48-month, $2.9 billion extended arrangement under the Extended Fund Facility (EFF) to support Sri Lanka's economic policies and reforms.

The IMF mission that visited Sri Lanka for the first review of the global lender-supported Extended Fund Facility programme for the country noted that despite early signs of stabilisation, full economic recovery is not yet assured.

"Sri Lanka will have access to SDR 254 million (about US$330 million) in financing once the review is approved by IMF Management and IMF Executive Board," the IMF said in a release on Thursday.

The release of the second tranche at the conclusion of the first review of the facility approved in March is subject to approval by the IMF executive board in the period ahead, it said.

The IMF however said despite showing early signs of stabilisation the full economic recovery is not yet assured.

It stressed, Sri Lanka's external position has weakened as a result of prolonged debt restructuring discussions and reserve accumulation has slowed in recent months.

It said Sri Lanka needed to increase revenues and signal better governance by adopting needed tax measures.

The IMF has urged for agreement with creditors for debt treatment.

It said that delays in debt restructuring risk worsening the economic outlook for the country.

We urge all official creditors to move forward and agree on an appropriate debt treatment in line with financing assurances they provided, the statement said.

The IMF has noted that inflation is down from a peak of 70 per cent in September 2022 to 1.3 per cent in September 2023, gross international reserves increased by 1.5 bn dollars during March-June this year, and shortages of essentials have eased.

While addressing reporters, Peter Breuer, senior IMF Sri Lanka mission chief, said Sri Lanka needed to perform more enabling the staff-level agreement to be submitted at the IMF executive committee meeting.

The first Implement by the authorities of the prior action that had been agreed in line with the programme's objectives.

Second, is the completion of the so-called financial assurance reviews which includes confirming whether adequate progress has been made with debt restructuring to give confidence that this restructuring will be concluded in a timely manner and also in line with the program debt targets.

Breuer said Sri Lanka suffered a revenue shortfall in 2023.

So clearly the objective is not to let that happen next year. To make up for that shortfall one of the objectives is to get to revenue that exceeds 12 per cent of the GDP.

Accordingly, measures will have to be implemented to achieve that objective, Sri Lanka is a country with one of the lowest tax takes in the world - that was a key contributor to the crisis especially when taxes were even lowered in 2019.