Sri Lanka has received a $2.9bn bailout from the International Monetary Fund (IMF) to help it deal with the worst economic crisis in its history, reported British media house BBC. The country’s economy had been hit hard by the pandemic, rising energy prices, and populist tax cuts.
The government now plans to raise funds by restructuring state-owned enterprises and privatising the national airline. However, analysts warn that Sri Lanka still faces a tough road ahead. The country defaulted on its debts with international lenders last May for the first time in its history.
Earlier this year, the country introduced income taxes for professionals, ranging from 12.5% to more than 36%. It also raised other taxes to pay for critical purchases, including fuel and food. This is in stark contrast from the big tax cuts former Sri Lanka president Gotabaya Rajapaksa introduced in 2019, which lost the government income of more than $1.4bn (£1.14bn) a year.
Andrew Wood, analyst at the S&P Global Ratings agency, was quoted as saying by BBC: “Sri Lanka still faces a long road toward consolidation of its government balance sheet, consistent economic growth, and external stability. We expect the economy to contract again in 2023, albeit at a more modest pace, before returning to growth in 2024."
Sri Lanka has secured financing assurances from all its major creditors, including China and India, which paved the way for the bailout. Sri Lanka’s foreign minister, Ali Sabry, was quoted as saying by BBC that it would be “a little premature” to discuss if China, which was Sri Lanka’s biggest bilateral lender, would write off some of the debts owed to it. “We want to pay, but we don’t have the capacity to do so. We are now trying to build up that capacity,” he said.
The Sri Lankan government had initially hoped come to terms with China and India over a new payment plan by the end of 2022. Sri Lanka owes China around $7bn (£5.71bn) while It owes India around $1bn (£820m).