COLOMBO, Sri Lanka (AP) -- The International Monetary Fund announced Thursday it has reached a preliminary agreement to provide Sri Lanka with $2.9 billion over four years to help it recover from its worst economic crisis.
The arrangement will help restore financial and macroeconomic stability and debt sustainability as well as enable the country's growth potential, an IMF team visiting Sri Lanka said in a statement.
The package is contingent on approval from the IMF management and executive board, as well as on receiving assurances from Sri Lanka's creditors, which include China, India and Japan, that debt sustainability will be restored.
Speaking to reporters in Colombo, the IMF's Peter Breuer said that since Sri Lanka's debt is currently unsustainable, the lender will need to see an engagement between the country and its creditors before it can commit resources. "If creditors are not willing to provide these assurances, that will deepen the crisis in Sri Lanka and would undermine its repayment capacity," he said.
He said a collaboration between the creditors and Sri Lanka will help the nation emerge from the crisis faster, and suggested holding a forum between the two sides on restructuring its debts.
Sri Lanka is in the midst of an unprecedented economic crisis with acute monthslong shortages of essentials such as fuel, medicine and cooking gas due to a severe shortage of foreign currency. Though cooking gas supplies were restored through World Bank support, shortages of fuel, critical medicines and some food items continue.
The island nation has suspended repayment of nearly $7 billion in foreign debt due this year. The country's total foreign debt amounts to more than $51 billion, of which $28 billion has to be repaid by 2028.
Sri Lanka's economy is expected to shrink by 8.7% in 2022 with inflation rising above 60%, the IMF said, adding that the impact is greatest on the poor and vulnerable.
The lender said its package will focus on stabilizing the economy, protecting the livelihoods of citizens and helping spur growth. Key elements include major tax and energy pricing reforms, raising social spending, replenishing foreign exchange reserves and introducing a stronger anti-corruption legal framework.
On Tuesday, Sri Lanka's president, Ranil Wickremesinghe, said talks with the IMF had successfully reached final stages as he presented an interim budget aimed at obtaining a rescue package. Measures outlined included raising some taxes, slashing capital expenditures, taming inflation and bolstering relief programs.
Wickremesinghe delivered his first budget proposal after being elected by Parliament in July to fill the rest of the five-year term of ousted President Gotabaya Rajapaksa, who fled the country in July and resigned after protesters who blame him and his family for the crisis stormed his official residence.
Wickremesinghe said the United Nations and other international organizations have launched a program to ensure food security. Schools have reopened and universities have resumed classes after long closures, he said. However, long fuel lines have reappeared after a quota system seemed to have brought them under control over the past weeks.
In his budget speech, Wickremesinghe said his administration's fiscal program will strive to increase government revenue to around 15% of GDP by 2025, cut public sector debt, control inflation and increase the value added tax to 15% from the current 12%.
The new budget came amid a relative calm following months of public protests that ousted the once-powerful Rajapaksa political dynasty. Sri Lanka's crisis was made worse by global factors such as the pandemic and Russia's invasion of Ukraine, but many have accused the Rajapaksas of severe economic mismanagement and corruption that pushed the country into bankruptcy.
Rajapaksa is now in Thailand. Leaders of his political party say he is expected to return from exile early in September and have asked Wickremesinghe to provide him with security and facilities to which a former president is legally entitled.
Since becoming president, Wickremesinghe has cracked down on protesters and dismantled their main camp outside the president's office. The use of a harsh anti-terror law to detain a protest leader led to the United States and European Union raising human rights concerns.