IMF bailout for Sri Lanka finally comes through: what is the background, what happens now?

While the IMF package is hardly sufficient — the first tranche is $33 million — to tide over Sri Lanka's crisis, it will help the country restore its credibility with international private creditors

IMF says $3 bln loan for Sri Lanka will catalyze lending from others

A vendor checks his mobile phone while waiting for customers at a marketin Colombo, Sri Lanka, on March 21. (Photo: Reuters)

Six months after Sri Lanka qualified for an International Monetary Fund (IMF) Extended Fund Facility of $2.9 billion to tide over the worst economic crisis in its history, the IMF Board finally signed off on the arrangement after receiving requisite financial assurances to restore debt sustainability from the country’s biggest bilateral donors — China, India and Japan.

President Ranil Wickremesinghe tweeted his thanks to the IMF.

“In the 75 years of Sri Lanka’s independence, there has never been a more critical period for our economic future. IMF Executive Board approved our programme, enabling Sri Lanka to access up to $7b in funding from IMF & IFIs. I thank the IMF & our international partners for support,” Wickremesinghe posted on Twitter early on Tuesday (March 21).

While the IMF package is hardly sufficient — the first tranche is $330 million — to tide over Sri Lanka’s crisis, it will help the country restore its credibility with international private creditors, as referenced by Wickremesinghe in his tweet.

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The Board’s green light comes at a time when Wickremesinghe is under fire from Sri Lanka’s main opposition parties as well as from civil society groups and trade unions who led last year’s Aragalaya Movement that led to a dramatic change in the country’s political leadership, and catapulted Wickremesinghe to the top job.

Wickremesinghe has been accused of using high-handed methods to contain the protests, including the arbitrary arrests of a number of activists. He has also put off holding local body elections citing the lack of funds, though opposition parties believe the postponement was due to Wickremesinghe’s lack of confidence that his side — which comprises the ousted Rajapakasas and their party, the Sri Lanka Podujana Peramuna — would able to win.

The assurance from bilateral donors that they would support Sri Lanka’s debt restructuring was a precondition that Sri Lanka had to meet to unlock the arrangement with the IMF. Wickremesinghe had promised the country that this would happen before December 2022, then pushed the deadline further as China played hard to get.

Finally, on March 7, Wickremesinghe was able to tell Parliament that the Chinese Exim Bank had sent the government a “new letter” of support. In January, the Exim Bank had said it was ready to observe a two-year moratorium on Sri Lanka’s debt to it.

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This time, according to a report by Reuters, the letter from the Bank reiterated the two-year moratorium, and also offered to negotiate the specifics of debt-treatment in the coming months. Quoting IMF data, the report said Sri Lanka owed the Exim Bank $2.83 billion at the end of 2022, or nearly 9% of total external central government debt.

Sri Lanka’s total external debt at the end of 2022, including to both bilateral and private creditors, was $ 82 bn, of which $ 2bn has to be serviced by June this year.