San Francisco Frontiers - IMF resumes Sri Lanka bailout after China's debt deal

The IMF said its board completed the first review of Sri Lanka's rescue package known as the Extended Fund facility (EFF) and released the second tranche of $337 million to support economic policies and reforms.

Sri Lanka had expected the progress review to be completed by September, but it was held up pending assurances of debt restructuring by China, the island's largest single bilateral creditor.

The nation of 22 million people defaulted on its $46 billion external debt in April last year after running out of foreign exchange to finance even the most essential imports such as food, fuel and medicines.

The country went to the IMF and secured the rescue loan spread over four years with the first instalment of $330 million paid in March. With Tuesday's decision, Sri Lanka has received about $670 million of the full loan.

Last month, Colombo announced it had struck an "agreement in principle" with its lenders, including China, to restructure nearly $6 billion in bilateral loans and unlock further IMF funding.

The finance ministry said the deal included a mix of extending the tenure and reducing interest on around $5.9 billion in bilateral loans.

China had been reluctant to take a haircut on its loans and instead had offered to extend the term of its loans and adjust down interest rates.

"Sri Lanka's agreements-in-principle with the Official Creditors Committee and Export-Import Bank of China on debt treatments are consistent with the EFF targets.

"They are an important milestone putting Sri Lanka’s debt on the path towards sustainability," the IMF said.

It said Sri Lankan authorities had made "commendable progress" toward restoring debt sustainability, raising revenue, rebuilding reserves, reducing inflation, and safeguarding financial stability.

Inflation, which peaked at nearly 70 percent in September last year, had eased to 1.5 percent last month.

However, strong commitment to improving governance and protecting the poor and vulnerable remains critical, the international lender of last resort added.

At the height of last year's economic crisis, civil unrest forced the ouster of then-president Gotabaya Rajapaksa when protesters stormed his residence.

His successor, Ranil Wickremesinghe has doubled taxes, withdrawn generous energy subsidies and raised prices of essentials to shore up state revenue.

U.Campbell--SFF