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IMF’s first review of bailout program for Sri Lanka gets underway

The inaugural meeting for the International Monetary Fund’s first review of the Extended Fund Facility (EFF) program for Sri Lanka commenced in Colombo on Thursday (Sept. 14).

In a statement, Finance State Minister Shehan Semasinghe said Sri Lankan officials are collaborating closely with the IMF team throughout this process to overcome the challenges ahead.
The Sri Lankan government is fully committed to establishing a sustainable economy, Semasinghe assured. “We recognize the importance of working closely with all multilateral institutions, development partners and our friendly nations. We wish to thank the IMF team for the support extended to Sri Lanka.”

Semasinghe notes that this review is a significant milestone towards securing the second tranche of and enhancing confidence in Sri Lanka’s economic recovery, adding that the successful completion of the first IMF review puts the country in a strong position for economic recovery and sets a promising pathway for growth in 2024.

A delegation of the Washington-based global lender is in Colombo for the review which will go on until September 27.

Sri Lanka, grappling with its worst financial crisis in more than seven decades after its foreign exchange reserves depleted to record lows, managed to secure a bailout package of nearly USD 3 billion in March 2023. The IMF’s executive board had approved a 48-month arrangement of SDR 2.286 billion (USD 2.9 billion) supported by the EFF to help Sri Lanka ride out its economic crisis.

The loan program aims to restore Sri Lanka’s macroeconomic stability and debt sustainability, mitigating the economic impact on the poor and vulnerable, safeguarding financial sector stability, and strengthening governance and growth potential. It also allows Sri Lanka to access financing of up to USD 7 billion from international financial institutions (IFIs) and multilateral organizations.

Under the IMF program, Sri Lanka has set a target of restructuring its debt for the next 10 years and reducing its debt-to-GDP ratio from the current 120% to about 95% by 2032. However, Sri Lanka still needs to complete talks with key bilateral creditors, including Japan, China and India, before it can take the next step to restructure its debt.

The first review will assess the country’s performance under the EFF program until end-June. It will be presented before the IMF executive board in October and if approved, it would allow a disbursement of the second tranche of funds amounting to USD 338 million.

During the review, Sri Lanka has to convince the IMF officials that it has met the key goals of the bailout program to continue the debt restructuring efforts that are crucial to its economic recovery process.

Sri Lanka received the first tranche of the EFF, amounting to USD 333 million, shortly after the IMF executive board green-lighted the bailout package in March.

An IMF delegation visited the island nation in May 2023 and said keeping up the economic reform momentum and ensuring timely implementation of the IMF-supported program’s commitments are key for Sri Lanka to emerge from the economic crisis.

It also said the overall macroeconomic and policy environment remains challenging despite the macroeconomic situation in Sri Lanka showing tentative signs of improvement following strong policy efforts, with inflation moderating, the exchange rate stabilizing, and the Central Bank rebuilding reserves buffers.

Ahead of the IMF’s first program review, Sri Lanka has accepted offers to exchange nearly USD 10 billion worth of defaulted local debt for new bonds under the domestic debt restructuring program, taking a step closer to meeting debt restructuring requirements. A total of Rs. 3.2 trillion (USD 9.99 billion) of the Rs. 8.7 trillion in bonds eligible for exchange were accepted, the Finance Ministry said in a statement. The settlement date of the exchange has been set for Sept. 14.

Domestic debt restructuring is expected to set the stage for foreign debt negotiations on USD 36 billion external debt including $24 billion held by bondholders and bilateral creditors such as China, Japan and India.

Sri Lanka is aiming to finalize bilateral debt restructuring talks by September to align with the first review of its IMF program. Upon completion of debt restructuring, the island nation hopes to reduce its overall debt by USD 16.9 billion.