Sri Lanka Crisis: IMF Inks Preliminary Agreement For $2.9 Billion Loan Spread Over Four Years

The island nation is expected to restructure its debt worth $29 billion, with Japan expected to coordinate with other creditor nations, including China on this issue

Motorcycles are parked in front of a Ceylon Petroleum Corporation gas station in Colombo

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The International Monetary Fund has reached a preliminary agreement with debt-ridden Sri Lanka for a loan of about $2.9 billion spread over four years, the global lender announced on Thursday. The IMF concluded the preliminary agreement after almost nine days of talks, reported news agency AFP.

The global body said the loan was aimed at restoring macroeconomic stability and debt sustainability while safeguarding financial stability in Sri Lanka, among other factors.

Sri Lanka is going through the worst economic crisis since independence in 1948, with its inflation level hitting a whopping 64.3 per cent in August.

“Financing assurances to restore debt sustainability from Sri Lanka’s official creditors and making a good faith effort to reach a collaborative agreement with private creditors are crucial before the IMF can provide financial support to Sri Lanka," PTI quoted the IMF as saying.

The talks with IMF started in late April after Sri Lanka announced its first international debt default. Legal and debt advisors were appointed to tackle the debt restructuring as prescribed by the IMF.

"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," the IMF said.

The IMF has directed the island nation to increase fiscal revenue through tax reforms, cost recovery-based pricing for fuel and electricity, raising social spending for supporting poor and vulnerable in the ongoing economic crisis, restoring flexible exchange rate, a capitalised banking system and a stronger anti-corruption legal framework.

The IMF said Sri Lanka's economy is expected to contract by 8.7% this year as inflation soars above 60%.

The island nation is expected to restructure its debt worth $29 billion, with Japan expected to coordinate with other creditor nations, including China on this issue, according to the PTI report.

In mid-April, Sri Lanka declared its first international debt default due to a foreign exchange crisis. The country owes $51 billion in foreign debt, of which $28 billion must be paid by 2027.

In its latest assessment, the World Bank has ranked Sri Lanka fifth with the highest food price inflation in the world. Sri Lanka is ranked behind Zimbabwe, Venezuela, and Turkey, while Lebanon leads the list.