IMF Approves Third Review of Sri Lanka's $2.9 Billion Bailout Package

The International Monetary Fund (IMF) has approved the third review of Sri Lanka's $2.9 billion bailout package, which was secured in March 2023 to stabilise the country’s ailing economy. The IMF will release an additional $333 million as part of the approval, bringing the total funding disbursed to approximately $1.3 billion. Despite signs of a potential recovery, the global lender cautioned that Sri Lanka's economy remains vulnerable to external shocks.

Economic Recovery Underway but Risks Persist

Following the approval, the IMF noted that signs of economic recovery were emerging in Sri Lanka, which had endured its worst financial crisis in more than 70 years. The country was hit hard by a severe dollar shortage, leading to soaring inflation and a significant economic contraction. However, in recent months, the Sri Lankan rupee has strengthened by 11.3 per cent, and inflation has eased to the point where prices fell by 0.8 per cent in the last month. The World Bank forecasts that Sri Lanka's economy will grow by 4.4 per cent this year, marking the first economic growth in three years.

Debt Restructuring Efforts Remain Crucial

While there are positive indicators, the IMF emphasised that Sri Lanka must complete critical debt restructuring processes to fully stabilise its financial position. This includes finalising a $12.5 billion bondholder debt restructuring and a separate $10 billion restructuring agreement with bilateral creditors, such as Japan, China, and India. The IMF warned that these efforts must be completed for the program to continue progressing.

Focus on Fiscal Reforms and Tax Revenue Targets
The IMF also stressed the importance of continued fiscal reforms, particularly in terms of tax revenue and the restructuring of state-owned enterprises. Achieving a primary surplus target of 2.3% of gross domestic product (GDP) next year is critical to maintaining the program’s momentum. IMF Senior Mission Chief Peter Breuer highlighted that Sri Lankan authorities have committed to adhering to the program’s requirements and will be submitting a package to parliament soon. The government’s interim budget, expected in December, will lay out the fiscal framework for 2024.

Debt Restructuring Deadline Set for December
Sri Lanka's newly elected president, Anura Kumara Dissanayake, has set a goal to complete the country’s debt restructuring by the end of December. The IMF's approval of the third review is seen as a positive step forward, but the completion of these key financial reforms will determine the success of the bailout program and Sri Lanka’s future economic recovery.