Sri Lanka defaulted on its foreign debt in April 2022 as the country plunged into its worst economic downturn since independence because of a major shortage in foreign currency reserves.
The International Monetary Fund has approved Sri Lanka's request for a $2.9 billion bailout, the country's president said, raising hopes for an easing of the island nation's dire economic crisis.
The IMF's board also confirmed on Monday it has signed off on the loan, which clears the way for the release of funds and kicks off a four-year programme designed to shore up the country's economy.
But its managing director Kristalina Georgieva warned that Colombo must continue pursuing tax reform and greater social safety nets for the poor –– and rein in the corruption that has been partly blamed for the crisis.
"I express my gratitude to the IMF and our international partners for their support as we look to get the economy back on track for the long term through prudent fiscal management and our ambitious reform agenda," President Ranil Wickremesinghe said in a statement.
Sri Lanka defaulted on its foreign debt in April 2022 as the country plunged into its worst economic downturn since independence because of a major shortage of foreign currency reserves.
The Indian Ocean nation of around 22 million people ran out of cash to finance even the most essential imports, causing massive social unrest.
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Widespread protests over economic mismanagement, acute shortages of food, fuel and medicines, and runaway inflation forced president Gotabaya Rajapaksa to flee the country and resign in July.
Rajapaksa was replaced by Wickremesinghe as president. He has implemented tough spending cuts and tax hikes in an attempt to secure the IMF assistance.
IMF staff had provisionally approved the bailout in September, but the final green light was held up until China, the island's biggest bilateral lender, agreed to restructure its loans to Colombo.
Beijing had said this year it was offering a two-year moratorium on its loans to Sri Lanka, but the concession fell short of IMF expectations for the sustainability of the island's debt.
Wickremesinghe had said after China agreed to restructure its loans that he expected the first tranche of the IMF package would be made available within the month.
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Moratorium on foreign debt
Earlier Monday, Wickremesinghe's office said he was seeking a 10-year moratorium on Sri Lanka's foreign debt as the country was out of foreign reserves to service its loans.
Colombo is also banking on the IMF deal to unfreeze billions of dollars in foreign aid for projects suspended since Sri Lanka defaulted on its loans last year.
The government has already doubled taxes, increased energy tariffs threefold and slashed subsidies in an effort to meet the preconditions of the IMF bailout.
Georgieva said Sri Lanka must stick with its controversial tax reforms, manage government expenditure and do away with energy subsidies.
Sri Lanka's economy shrank by a record 7.8 percent last year as it grappled with its worst foreign exchange shortage since independence from Britain in 1948.