COLOMBO, Sri Lanka – Sri Lanka and the International Monetary Fund on Thursday reached a preliminary agreement on a bailout package as the bankrupt island nation tries to find a way out of a financial crisis. crippling economic crisis overthrew its president.
The deal, which still needs final approval from the IMF’s executive board, will extend a $2.9 billion emergency loan, in return for which the country’s economy will be overhauled to reduce the fiscal deficit. . The support will also be conditional on Sri Lanka joining with creditors such as Japan, China and India to restructure the huge foreign debt it defaulted on this year.
“Financial security to restore debt sustainability from Sri Lanka’s official creditors and a good faith effort to reach a cooperative agreement with private creditors is critical before the IMF can provide a provide financial support to Sri Lanka,” the organization said in a statement. – loan agreement under 48-month agreement.
Sri Lanka’s debt crisis peaked in the spring, when the South Asian nation of 22 million people ran out of foreign exchange reserves for essential imports such as fuel and medicine. After many months of maintenance protest about the worsening conditionPresident Gotabaya Rajapaksa, whose family has dominated Sri Lankan politics for most of the past two decades, was forced out in July.
new president, Ranil Wickremesinghewarned of difficult times ahead as he tried to lay the groundwork for measures that could get the economy on track.
To reduce government costs, he raised electricity and fuel prices, which were heavily subsidized. Due to the soaring cost of energy imports, reaching $500 million in a number of months, the country has cut fuel and continued a widespread ban on imported foreign goods.
In August, inflation for food items hit nearly 94 percent year-on-year, and transportation costs jumped nearly 150 percent, according to data released Wednesday by the Central Bank of Sri Lanka.
Sri Lanka’s external debt is around $50 billion, mostly from multilateral lenders and government bonds. Debts have skyrocketed in recent years due to massive tax cuts and reckless spending on expansive infrastructure projects. The final blow came with the pandemic shutdowns, which cost the country billions of remittances as well as tourism revenue.
Japan, one of the main bilateral lenders, has announced its readiness to convene a creditors’ conference to help restructure its debt, but it is unclear when such a meeting will take place or whether China attend or not.
The two countries, along with India, are the main bilateral lenders. As Sri Lanka fell into crisis this year and struggled to get new capital, India extended billions of dollars in loans, lines of credit and currency swaps.
For months, Sri Lanka’s economic crisis worsened as officials in Mr Rajapaksa’s government continued to deny the gravity of the situation. Negotiations with the IMF finally began in April in Washington, followed by virtual talks and visits by IMF teams.
Discussions 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. said.
WA Wijewardena, an economist who previously served as Deputy Governor of the Central Bank of Sri Lanka, said some of the required reforms – such as reducing the retirement age or improving tax collection – would be easier on the government. government compared to other reforms.
Privatizing state-owned enterprises that are a burden on the treasury, or shifting the economy to export-oriented will provide Sri Lanka with sufficient foreign exchange reserves, are long-term projects that require overcoming political interference from powerful unions.
“So unless the government can stick to this reform agenda with a specific timeline set out with milestones at each point, I don’t think we will be able to get the country back on track. back to the old growth path,” said Mr. Wijewardena.
Skandha Gunasekara reported from Colombo, and Mujib Mashal from Mumbai, India.
