The International Monetary Fund has tentatively offered Sri Lanka a $2.9bn (£2.5bn) loan to help the country recover from the worst economic crisis since its independence from Britain in 1948 .
The funding is intended to give some breathing room to Sri Lanka, which is struggling to restructure nearly $30 billion in debt to creditors including China, India and a range of international banks.
Sri Lanka defaulted on its external debts for the first time in its history in May. The country is grappling with runaway inflation that recently topped 64%, as well as food, fuel and medicine shortages that led to nationwide protests in the spring.
These demonstrations provoked deadly clashes in the streets of Colombo and led to the resignation of Mahinda Rajapaksa from the post of Prime Minister.
Sri Lanka’s economy has suffered from the Covid pandemic, which has caused a collapse in tourism. This triggered falling foreign exchange earnings and rising debt levels – a situation made worse by soaring global commodity prices due to the war in Ukraine.
The IMF deal has yet to be approved by the fund’s Washington-based management and is contingent on Sri Lanka implementing a series of previously agreed measures.
“The staff agreement is just the start of a long road for Sri Lanka,” senior IMF official Peter Breuer told reporters in Colombo, according to Reuters. “The authorities have already started the reform process and it must continue with determination.
The Sri Lankan authorities will need to embark on a four-year program involving significant tax changes, including the broadening of the scope of corporate tax and VAT, and the progressiveness of income tax. personal income.
The program also aims to give greater independence to Sri Lanka’s central bank, introduce new fuel and electricity tariffs, increase spending on social projects and replenish its depleted foreign exchange reserves.
However, the country has yet to strike deals with international banks and asset managers who hold the bulk of its $19 billion in sovereign bonds, which are now in default.
Japan has offered to hold talks with Sri Lanka’s other major creditors, including India and China, the latter of which has invested in the country under its Belt and Road Initiative.
The Beijing project, often described as a 21st century silk road, has allowed China to expand its international influence by investing in more than 70 countries, including Sri Lanka. It has helped countries in Asia, Africa and Eastern Europe build railroads and ports that connect to China, but often results in heavy government indebtedness to Beijing.
China’s approach to default is causing growing concern in the developing world, and Beijing is expected to seek preferential treatment in negotiations with Sri Lanka.
“If creditors are unwilling to provide assurances, it would aggravate Sri Lanka’s crisis and undermine repayment capacity,” Breuer said, according to reports, with the IMF official adding that it was in the interest of all creditors to cooperate.