To help Sri Lanka recover from its economic crisis and regain economic stability, the International Monetary Fund has tentatively agreed to provide a $2.9 billion loan for 48 months to that nation in South Asia.
The loan will be provided through the IMF’s Extended Fund Facility, which aids nations with their cash flow or balance of payments issues.
The situation in Sri Lanka is dire. Insufficient external buffers and an unsustainable public debt dynamic have increased vulnerabilities, according to a news statement from Peter Breuer and Masahiro Nozak of the IMF, who recently led a trip to Sri Lanka.
The April debt embargo caused Sri Lanka to default on its external debt, and the country’s dangerously low level of foreign reserves has made it difficult to import necessities like fuel, further slowing down economic growth.
The IMF predicted that this year’s inflation will rocket above 60%, causing Sri Lanka’s economy to decline by 8.7%.
The IMF stated that the funds “seek to stabilise the economy, protect the livelihoods of the Sri Lankan people, and prepare the ground for economic recovery and promote sustainable and inclusive growth” and added that “the burden has been disproportionately borne by the poor and vulnerable.”
The IMF stated that IMF management and the Executive Board must approve the new loan.
Additionally, it depends on local governments making sincere attempts to work together with private creditors and the IMF securing finance guarantees from Sri Lanka’s official creditors to restore debt sustainability.
To help assure debt sustainability and overcome financing gaps, Breuer and Nozak argued that Sri Lanka’s creditors must provide debt relief in addition to extra financing from multilateral partners.
The loan package includes assisting Sri Lanka in implementing significant tax reforms, such as more progressive taxation, broader corporate and VAT taxes, and raising fiscal income.
By 2024, it is intended to assist Sri Lanka’s government in achieving a budget surplus of 2.3% of GDP. A 9.8% of GDP deficit is expected in 2022.
Inflation in the nation, which reached 64.3% last month, would be brought under control by the IMF through data-driven monetary policy decisions and more central bank authority. According to the IMF, this would necessitate a new Central Bank Act.
Both parties will have ideas for boosting social expenditure and lowering corruption in order to lessen the impact of the crisis on the weak and impoverished.