1/18/23, 9:32 PM Sri Lanka and IMF reach preliminary deal on $2.

9 billion loan

BREAKING NEWS

ASIA E C ONOMY

Sri Lanka and IMF reach preliminary deal on $2.9 billion

loan
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KEY POINTS
The International Monetary Fund has preliminarily agreed to extend a 48-month $2.9
billion loan to Sri Lanka to help restore economic stability to the crisis-hit South Asian
country.

The loan will be made under the IMF’s Extended Fund Facility, which helps countries deal
with balance of payments or cash flow problems.

“Sri Lanka has been facing an acute crisis. Vulnerabilities have grown owing to
inadequate external buffers and an unsustainable public debt dynamic,” the IMF said in a
statement.

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1/18/23, 9:32 PM Sri Lanka and IMF reach preliminary deal on $2.9 billion loan

The International Monetary Fund has preliminarily agreed to extend a 48-month $2.9 billion
loan to Sri Lanka to help restore economic stability to the crisis-hit South Asian country.
VIDEO 02:19

Important to ensure financing flows back to Sri Lanka so crisis can end: IMF
The loan will be made under the IMF’s Extended Fund Facility, which helps countries deal with
balance of payments or cash flow problems. It will only be disbursed after satisfactory debt
restructuring, including debt relief arrangements have been struck between Sri Lankan
authorities and the country’s creditors.

Other reforms in the program — the 17th for Sri Lanka — include the reduction of corruption and
an increase in financial transparency.

“Sri Lanka has been facing an acute crisis. Vulnerabilities have grown owing to inadequate
external buffers and an unsustainable public debt dynamic,” the IMF’s Peter Breuer and
Masahiro Nozak, who led a mission to Sri Lanka in the past week, said in a press release.

“The April debt moratorium led to Sri Lanka defaulting on its external obligations, and a
critically low level of foreign reserves has hampered the import of essential goods, including
fuel, further impeding economic activity.”

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

“The impact has been disproportionately borne by the poor and vulnerable,” the IMF’s Breuer
and Nozak said, adding the funds “aim to stabilize the economy, protect the livelihoods of the Sri
Lankan people, and prepare the ground for economic recovery and promoting sustainable and
inclusive growth.”

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1/18/23, 9:32 PM Sri Lanka and IMF reach preliminary deal on $2.9 billion loan
Protestors here seen gathering outside the presidential secretariat in Colombo a week ago, have achieved their aim, with legislators soon to
elect a new president to replace Gotabaya Rajapaksa, who fled the country and resigned as president.
Arun Sankar | Afp | Getty Images

The IMF said the new loan is subject to approval by IMF management and the executive board. It
also said the loan cannot be made unless Sri Lankan authorities have conducted satisfactory debt
restructuring including debt relief arrangements with external creditors.

It is therefore contingent on the IMF receiving financing assurances from Sri Lanka’s official
creditors that deals have been reached and Sri Lanka is able to repay its debts. The IMF must also
be satisfied that local authorities have made good faith efforts to reach a collaborative agreement
with all other private creditors.

Sri Lanka has more than $50 billion in external debt owed to countries such as Japan and China
as well as the World Bank, according to the Sri Lanka central bank.

At a press conference Thursday, Breuer said the preliminary agreement is a signal from the Sri
Lankan authorities they were committed to comprehensive reforms that would be monitored by
the IMF.

“This is a credible device to show creditors that Sri Lanka is serious in engaging in reforms,”
Breuer said.

“It is assuring creditors that it will restore payment capacity and is committed to do so, to the
international committee.”

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1/18/23, 9:32 PM Sri Lanka and IMF reach preliminary deal on $2.9 billion loan

VIDEO 02:43

Sri Lanka’s central bank will continue monitoring inflation: Governor

Breuer urged creditors to collaborate with Sri Lanka on negotiations as delays in discussions can
stall the disbursement of IMF funds and deepen the crisis on the island nation.

He also told CNBC that loans relating to China’s Belt and Road Initiative would be restructured
as part of Sri Lanka’s overall debt negotiations.

If approved by the IMF, the first lot funds will be released at the time of approval with subsequent
disbursements made over IMF’s EEF program periods, Nozak said. A review will precede each
set of payments.

The loan program also includes helping Sri Lanka raise fiscal revenue and implement major tax
reforms, including more progressive taxation and broader corporate and VAT taxes.

It aims to help the Sri Lankan government reach a fiscal surplus of 2.3% of GDP by 2024. It has a
projected 2022 deficit of 9.8% of GDP.

Nozak said Sri Lanka’s tax collection was very low but new taxes that are collected must come
from high-income earners so the poor and vulnerable would not be impacted.

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1/18/23, 9:32 PM Sri Lanka and IMF reach preliminary deal on $2.9 billion loan

VIDEO 01:41

Sri Lanka stock exchange chairman foresees four to five more months of difficulty

The IMF will also help the country — where inflation hit 64.3% last month — restore price
stability through data-driven monetary policy action as well as stronger autonomy for the central
bank. This would require a new Central Bank Act, the IMF said.

“Central bank independence is indeed very important. It is important to reduce and eliminate
monetary financing — meaning the financing of the government by printing money — which fuels
inflation, which in turn is a high tax on everyone in the country,” Breuer told CNBC.

He added that successful implementation of the reforms could create a “catalytic effect” where
private flows including investments would flow back into Sri Lanka helping it rebuild its reserves.

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1/18/23, 9:32 PM Sri Lanka and IMF reach preliminary deal on $2.9 billion loan

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