(Bloomberg) -- Sri Lanka secured an initial funding approval from the International Monetary Fund, paving the way for the South Asian country to receive the next loan tranche from a $3 billion bailout program.
The staff-level agreement on economic policies must be approved by the IMF's executive board before the island nation can receive its next payout of about $330 million, the Washington-based lender said on Thursday. Securing a deal with official creditors to restructure debt is critical, it said.
“Macroeconomic policy reforms are starting to bear fruit and the economy is showing tentative signs of stabilization,” the IMF said in a statement. Fixing governance weaknesses and corruption vulnerabilities are needed to put the economy on a path toward lasting recovery, it added.
Sri Lanka made some progress with its debt restructuring recently, carrying out an exchange of local debt and striking a tentative deal with the Export-Import Bank of China. A group of dollar bondholders also submitted a restructuring proposal, though it did not receive a favorable response from Sri Lanka.
The country's dollar bonds had surged more than 60% this year, as the IMF's bailout spurred optimism over its fiscal recovery. Notes due 2030 were steady at about 49 cents on the dollar after sliding 2 cents on Thursday.
Sri Lanka has taken steps to boost tax revenue and inflation has eased to 1.3% in September from about 50% in March, as it pushes ahead with reforms after defaulting on its debt last year. The nation needs to rebuild its foreign-exchange reserves to strengthen its buffers, the IMF said.
(Updates with bonds performance in fifth paragraph.)
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