The World Bank said, on Thursday, that Sri Lanka has reached a preliminary agreement with the International Monetary Fund to obtain a loan of about $ 2.9 billion, at a time when the country is seeking to find a way out of the worst economic crisis in decades.
The agreement, first reported by Reuters on Wednesday, is subject to approval by the IMF’s management and its executive board, and is contingent on Sri Lankan authorities following up on previously agreed actions.
“This staff-level agreement is only the beginning of a long road for Sri Lanka to get out of the crisis,” senior IMF official Peter Brewer told reporters in Colombo.
“The authorities have already begun the reform process and it will be important to continue on this path with determination,” he added.
The IMF’s terms of the loan also include receiving funding assurances from Sri Lanka’s official creditors and efforts by the country to reach an agreement with private creditors.
Its four-year program will aim to boost government revenues, encourage fiscal consolidation, introduce new fuel and electricity prices, increase social spending, enhance central bank independence, and rebuild depleted foreign reserves.
The country’s reserves stood at $1.82 billion in July, according to central bank data.
“Starting with one of the lowest revenue levels in the world, the program will implement significant tax reforms. These reforms include making the personal income tax more progressive and expanding the tax base for corporate income tax and value added tax,” the statement said.
“The program aims to achieve a primary surplus of 2.3% of GDP by 2024,” she added.
Once the IMF package is approved, Sri Lanka is also likely to receive more financial support from other multilateral creditors.
The country’s CSE All-Share (.CSE) Index ended 2% higher, building on a 17% gain last month.
Sri Lanka’s current financial turmoil, the worst since the country gained independence from Britain in 1948, stems from economic mismanagement as well as the COVID-19 pandemic that has wiped out the country’s main tourism industry.
Sri Lankans have faced severe shortages of fuel and other basic goods for months, sparking unprecedented protests that led to a change of government.
Ranil Wickremesinghe, a veteran MP who took office in July, has faced an uphill battle to stabilize the economy, which has been plagued by hyperinflation that is now nearly 65% year-on-year.
Odishan Jonas, chief strategist at Sri Lankan investment bank CAL Group, said the IMF’s comments were largely positive.
“They said the revenue actions we took were significant (and they are) happy with what we’ve done from a financial perspective,” he said.
Although welfare budgets for Sri Lanka’s poorest will be protected, Jonas expects significant austerity measures and job cuts at money-losing state-owned firms.
“Privatization is on the table, and I think it will probably happen by next year,” he said.
Wickremesinghe, who is also the country’s finance minister, on Tuesday presented an interim budget aimed at concluding the deal with the International Monetary Fund.
The budget revised Sri Lanka’s deficit forecast for 2022 to 9.8% of GDP from 8.8% earlier, while outlining fiscal reforms, including an increase in value-added taxes.
The IMF’s Brewer said the initial agreement highlighted the Wickremesinghe government’s commitment to comprehensive and important reforms.
“This is a credible device to show creditors that Sri Lanka is serious about engaging in reforms,” he said.
Sri Lanka needs to restructure nearly $30 billion in debt, and Japan has offered to lead talks with its other major creditors, including regional rivals India and China.
“If the creditors do not want to provide these assurances, it will actually deepen the crisis here in Sri Lanka and undermine its ability to repay,” Brewer said.
Sri Lanka will also need to strike a deal with international banks and asset managers who own the majority of its $19 billion sovereign bonds, which are now classified as delinquent.
Sri Lanka’s debt had risen to unsustainable levels in the run-up to the crisis. Years of populist tax cuts drained finances, which the pandemic has hobbled even more.
The damage was exacerbated by the ban on chemical fertilizers that hit the agriculture industry, followed by skyrocketing oil and food prices due to the conflict in Ukraine.
“In our view, it is important to move quickly,” Brewer said, noting the need for creditors to work together.
“That’s really the key here. Because we want to avoid a worsening of the crisis.”