Second tranche of IMF bailout to Sri Lanka may be delayed; talks with govt to continue: official

Sri Lanka was banking on the release of the second tranche of around USD 330 million at the end of the review as stated by State Minister of Finance Ranjith Siyambalapitiya last week.

Colombo: Sri Lanka‘s second tranche of a USD 2.9 billion bailout package from the IMF is likely to be delayed due to the inconclusive nature of the cash-strapped nation’s external debt restructuring even as the global lender said on Wednesday that it will continue discussions to reach a staff-level agreement.

Sri Lanka was hit by its worst economic crisis in history when the country’s foreign exchange reserves fell to a critical low and the public came out on the streets to protest the shortage of fuel, fertilisers and essential commodities.

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The International Monetary Fund (IMF) in March this year approved a 48-month, USD 2.9 billion extended arrangement under the Extended Fund Facility (EFF) to support Sri Lanka’s economic policies and reforms.

The IMF mission that visited Sri Lanka for the first review of the global lender-supported Extended Fund Facility programme for the country noted that despite early signs of stabilisation, full economic recovery is not yet assured.

Sri Lanka was banking on the release of the second tranche of around USD 330 million at the end of the review as stated by State Minister of Finance Ranjith Siyambalapitiya last week.

“As Sri Lanka is restructuring its public debt which is in arrears, Executive Board approval of the first programme review requires the completion of financing assurances reviews. These financing assurances reviews will focus on whether adequate progress has been made with debt restructuring to give confidence that it will be concluded in a timely manner and in line with the program’s debt targets,” Peter Breuer, the team leader, told reporters here on Wednesday.

“We need two important things to be satisfied. We need to reach agreement on set targets, policies, and reforms that will allow us to go forward… with the understanding that the objective of the programme can be reached,” Breuer said.

“The team will continue its discussions in the context of the First Review with the goal of reaching a staff-level agreement in the near term. We reaffirm our commitment to support Sri Lanka at this difficult time.” The IMF had expected Sri Lanka to finalise its external debt restructuring of USD 41 billion by mid-September for its first review.

In the review, the IMF noted that Sri Lanka had made commendable progress in implementing difficult but much-needed reforms.

“These efforts are bearing fruit as the economy is showing tentative signs of stabilisation. Inflation is down from a peak of 70 per cent in September 2022 to below 2 per cent in September 2023, gross international reserves increased by USD 1.5 billion during March-June this year, and shortages of essentials have eased”.

It, however, added that “despite early signs of stabilization, full economic recovery is not yet assured. Growth momentum remains subdued”.

The IMF has warned that an expected shortfall of government revenue by year-end could weaken the government’s ability to provide essential public services.

“To increase revenues and signal better governance, it is important to strengthen tax administration, remove tax exemptions, and actively eliminate tax evasion,” it added.

Sri Lanka began seeking the IMF bailout only after it declared its first-ever sovereign debt default in April 2022.

The resultant political crisis forced the then president Gotabaya Rajapaksa to resign in July 2022.

His successor Ranil Wickremesinghe has steered the economy out of the mess by lowering inflation.

Having entered the IMF programme, the government set in a series of tax and utility services reforms which meant higher taxes and tariff hikes. Still, analysts say the island’s economy has only partially recovered.