May 28, 2024

IMF approves $3 billion extended fund facility for Sri Lanka to restore macroeconomic stability and debt sustainability

Managing Director Kristalina Georgieva participates in a one-on-one conversation with World Bank President David Malpass during the 2022 Annual Meetings at the International Monetary Fund. IMF Photo/Cory Hancock 10 October 2022 Washington, DC, United States Photo ref: CH221010001.jpg

The International Monetary Fund (IMF) has approved a 48-month extended arrangement under the Extended Fund Facility (EFF) for Sri Lanka. The agreement will provide SDR 2.286 billion (about US$3 billion) to support Sri Lanka’s economic policies and reforms. The EFF-supported program aims to restore macroeconomic stability and debt sustainability while mitigating the economic impact on the poor and vulnerable, safeguarding financial sector stability, and strengthening governance and growth potential.

Sri Lanka has been hit hard by a catastrophic economic and humanitarian crisis caused by pre-existing vulnerabilities and policy missteps, further aggravated by external shocks. The EFF-supported program will help mitigate the crisis and enable an immediate disbursement equivalent to SDR 254 million (about US$333 million), which will also catalyze financial support from other development partners.

The program’s objectives are in line with the IMF’s focus on protecting the most vulnerable while improving governance. Swift and timely implementation of the EFF-supported program is critical to overcome the crisis. Ambitious revenue-based fiscal consolidation is necessary for restoring fiscal and debt sustainability while protecting the poor and vulnerable.

Institutions and governance frameworks require deep reforms to restore Sri Lanka’s macroeconomic stability and debt sustainability. To achieve this, sustained fiscal institutional reforms on tax administration, public financial and expenditure management, and energy pricing are critical. Maintaining a sound and adequately capitalized banking system is important, and implementing a bank recapitalization plan and strengthening financial supervision and crisis management framework are crucial to ensure financial sector stability.

The ongoing efforts to tackle corruption should continue, including revamping anti-corruption legislation. The authorities should step up growth-enhancing structural reforms with technical assistance support from development partners. Close collaboration between Sri Lanka and all its creditors will be critical to expedite a debt treatment that will restore debt sustainability consistent with program parameters.

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