Sri Lanka Reaches Initial Deal With IMF For $2.9 Billion Loan

(Bloomberg) -- Sri Lanka reached a staff-level agreement with the International Monetary Fund for a $2.9 billion loan, a key step for the crisis-hit country to unlock more funding and restructure its debt.

The Extended Fund Facility arrangement will support Sri Lanka's program to restore macroeconomic stability and debt sustainability, the IMF said, adding that the 48-month program will be subject to approval by IMF management and the board.

“Against this backdrop, the authorities' program, supported by the Fund, would aim to stabilize the economy, protect the livelihoods of the Sri Lankan people, and prepare the ground for economic recovery and promoting sustainable and inclusive growth, the IMF said. 

The South Asian nation is grappling with its worst economic crisis since independence alongside a political turmoil that led to the formation of a new government. Dwindling foreign-exchange reserves, crippling shortages of essential items and Asia's fastest inflation have hammered the $81 billion economy.

Ahead of the IMF pact, Sri Lanka increased the value-added tax to 15% from 12% starting Sept. 1 and unveiled plans earlier this week to boost revenue to 15% of gross domestic product by 2025, reduce debt-to-GDP ratio to 100%, hit a 5% economic growth over the medium term and cool inflation that has accelerated above 60% to below 10%.

The CSE All Share index jumped 1.9%, up for a third straight day, while Sri Lanka's 7.55% 2030 dollar bond dropped 0.5 cents to 31.5 cents on the dollar after gaining 2 cents on the dollar on Wednesday.

The island nation needs about $5 billion for essential imports to tide it over for six months, President Ranil Wickremesinghe said in June when he was still the prime minister. The country, which earlier this year defaulted on its overseas debt for the first time, is also looking to negotiate with global funds that hold about $12.6 billion of its bonds.

Debt Restructuring

Apart from the IMF, Sri Lanka is tapping India, Japan and China for bridge financing. The country would need an agreement among its official creditors before it approaches the bond holders, Wickremesinghe had said.

“More color is needed on debt restructuring, especially how or whether or not creditors will engage given the large share of private bondholders,” said Junyu Tan, an economist at Natixis SA in Singapore. “This is key to debt sustainability in the near term” and a sustained improvement in the bond and foreign-exchange markets, he said.

Sri Lanka's foreign exchange reserves dropped to $1.82 billion at end July, from $1.86 billion a month earlier, as the nation kept on drawing from its dollar pile to buy fuel and other essentials. The amount includes a $1.5 billion swap arrangement with China that Sri Lanka can only access if overall reserves rise to a certain level.

Sri Lanka is seeking as much as $4 billion in aid from China, including the activation of the swap. The bankrupt nation has received about $3.8 billion from neighbor India and is negotiating for more. India has urged the IMF to treat all of Sri Lanka's creditors on par.

(Updates with details in table and fourth paragraph onwards)

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