COLOMBO, Sri Lanka — Sri Lanka and the International Monetary Fund reached a preliminary agreement on Thursday on a rescue package as the bankrupt island nation tries to find a way out of a devastating economic crisis that has overthrown its president.
The deal, which requires final approval by the IMF Executive Board, provides emergency loans worth $2.9 billion in exchange for overhauling the country’s economy to reduce its budget deficit. The aid is also contingent on Sri Lanka working with creditors in countries such as Japan, China and India to restructure the massive external debt it has defaulted on this year.
“Before the IMF provided financial support to Sri Lanka, it sought a good faith effort to finance guarantees to restore debt sustainability from Sri Lanka’s public creditors and to work with private creditors to reach agreements. It is important that we make a strong effort,” the organization said in a statement announcing staff. Level of agreement on loans under 48-month arrangements.
Sri Lanka’s debt crisis culminated in the spring when the South Asian nation of 22 million people depleted its foreign exchange reserves for vital imports such as fuel and medicines. President Gotabaya Rajapaksa, whose family has dominated Sri Lanka’s politics for much of the past two decades, was ousted in July after months of protests over deteriorating conditions.
New president Ranil Wickremesinghe is laying the groundwork for measures to get the economy back on track and has warned of difficult times ahead.
To cut government spending, he raised the prices of heavily subsidized electricity and fuel. As the cost of energy imports soared, reaching $500 million in a matter of months, the country continues to ration fuel and heavily ban imports of foreign products.
Data released by the Central Bank of Sri Lanka on Wednesday showed food inflation reaching almost 94% year-on-year in August, while transportation costs rose by almost 150%.
Sri Lanka’s external debt amounts to around $50 billion, mostly from multilateral lenders and government bonds. Debt has skyrocketed in recent years due to massive tax cuts and reckless spending on large infrastructure projects. The final blow has been delivered by the lockdowns caused by the pandemic, robbing the country of billions of outbound remittances and tourism revenue.
Japan, one of the major bilateral lenders, has announced its intention to convene a creditors meeting to help restructure its debt, but it remains unclear when such a meeting will be held or whether China will attend. It is not clear whether
Both countries are major bilateral lenders along with India. India has provided billions of dollars in loans, lines of credit and currency swaps as Sri Lanka has been in crisis this year and has struggled to raise new financing.
Sri Lanka’s economic crisis has worsened for months as senior officials in the Rajapaksa government continued to deny the seriousness of the situation. Negotiations with the IMF he finally began in Washington in April, followed by virtual negotiations and a visit by his IMF team.
The discussion focused on reducing Sri Lanka’s fiscal deficit and “designing a comprehensive economic program to correct macroeconomic imbalances and restore public debt sustainability,” the IMF said. Stated.
Economist WA Wijewardena, former deputy governor of the Central Bank of Sri Lanka, said some of the necessary reforms, such as lowering the retirement age and improving tax collection, would be easier for the government to achieve than others.
The privatization of state-owned enterprises that are burdening the state coffers and the transition to an export-oriented economy that will bring sufficient foreign exchange reserves to Sri Lanka are long-term projects that will need to overcome political pressure from powerful unions. .
“So unless the government can stick to this reform program and maintain a timeline with concrete milestones at each point in time, I don’t think the country can get back on the old growth trajectory,” Wijewardena said. I’m here. He said.
Skandha Gunasekara was reported from Colombo and Mujib Mashal from Mumbai, India.