The International Monetary Fund (IMF) has begun the first review of its $2.9 billion bailout package for Sri Lanka, a nation grappling with a severe economic crisis. The review, which started on Thursday, will assess the island's performance under the four-year program that was secured in March 2023. The IMF review team will remain in Sri Lanka until September 27, according to officials.
State Minister of Finance Shehan Semasinghe stated that the government is collaborating closely with the IMF team to overcome the challenges ahead. The second tranche of the bailout should be available at the end of this review process, he added.
Sri Lanka, a country of 22 million people, suffered its first foreign debt default in May 2022 following a severe dollar shortage that triggered its worst financial crisis. This led to large street protests over several months, escalating into a political crisis that culminated in former president Gotabaya Rajapaksa's resignation and departure from the country in mid-July.
In response to the crisis, Sri Lanka approached the IMF for its 16th facility and declared bankruptcy in April 2022. After months of negotiations, the government and the international lender reached an agreement resulting in the approval of a bailout package last March. The facility was approved subject to stringent reforms which the government claims to have implemented.
As part of the terms of the bailout, Sri Lanka needs to secure assurances of debt restructuring from bondholders and key bilateral lenders including China, Japan, and India. The country has asked foreign investors for a 30% haircut to help restructure its debt. These negotiations started last September and are still ongoing.
Under a domestic debt restructuring announced in June 2023, Sri Lanka accepted offers to exchange about $10 billion worth of defaulted local debt for new bonds, as per the Finance Ministry. The IMF bailout program has helped the island nation build up reserves, stem a fall in its currency, and control inflation.
Furthermore, India provided support worth $4 billion to finance imports of fuel and essentials during the crisis.
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