The International Monetary Fund (IMF) on March 20 cleared a $3 billion-Extended Fund Facility (EFF) for Sri Lanka, potentially unlocking more loans for the debt-ridden island nation that is struggling to recover from last year’s economic meltdown.
“The objectives of the EFF-supported programme are to restore macroeconomic stability and debt sustainability, safeguarding financial stability, and stepping up structural reforms to unlock Sri Lanka’s growth potential,” the IMF said, of its 17th agreement with the island.
Identifying corruption as a key issue, an IMF “governance diagnostic mission” has started assessing Sri Lanka’s governance and anti-corruption framework in its first such exercise in Asia, IMF officials said on March 21.
The DC-based lender’s nearly-$3 billion facility comes a year after Sri Lanka defaulted on its foreign debt amid an acute dollar crunch, and six months after the government reached a staff-level agreement.
Sri Lanka is “no longer a bankrupt country”, President Ranil Wickremesinghe said in a televised address on March 21, adding that the IMF programme would “serve as an assurance to the international community that Sri Lanka has the capacity to service its debt.” The IMF package enables Sri Lanka “to access up to $7 billion in funding from IMF & IFIs [International Financial Institutions]”, he noted, while thanking Sri Lanka’s partners.
India, Japan [as a member of the Paris Club group of creditors], and China — Sri Lanka’s top three bilateral creditors — played a crucial role in unlocking the IMF assistance to the island, by providing financing assurances to the Fund.
In an open letter to bilateral creditors last week, Mr. Wickremesinghe promised that Sri Lanka would be transparent in the debt restructuring process and ensure “comparable treatment of all external creditors”.
Although Sri Lanka has been desperate for the IMF’s assistance since last year’s financial crash, securing nearly ₹3 billion from it, over a period of four years, hardly guarantees swift economic recovery, Sri Lankan economists have cautioned. The crisis-hit country has a long way to go before actual recovery, as its fundamental fiscal challenges of a huge debt burden, a persisting trade deficit, and a balance of payments problem remain. In December 2022, Sri Lanka’s total outstanding public debt increased to $84 billion, according to Colombo-based think tank Verite Research. Further, the government must service multilateral debt totalling over $2 billion during the first half of this year.
