IMF resumes Sri Lanka bailout after China's debt deal

The International Monetary Fund revived its $2.9 billion bailout for Sri Lanka on Tuesday after the South Asian nation clinched a debt restructuring deal with China, its biggest official lender.

The IMF said its board had completed the first review of Sri Lanka’s rescue package known as the Extended Fund facility (EFF) and released the second tranche of $337 million to support economic policies and reforms.

Sri Lanka had expected the progress review to be completed by September, but it was held up pending financial assurances from China, which holds 52 percent of the island’s bilateral debt.

IMF’s mission chief for Sri Lanka, Peter Breuer, told reporters in Washington that Colombo had shared China’s debt-restructuring offer with the IMF on a “strictly confidential basis.”

However, it fell within the IMF’s debt sustainability targets for the island, he added.

He said policy reforms were starting to bear fruit and the economy was showing signs of stabilization, but the key to a full and swift recovery was sustaining reform momentum.

“We encourage the authorities to continue to build on these hard-won gains and further advance revenue mobilization,” Breuer said.

Colombo welcomed the latest IMF cash injection and reiterated its commitment to maintain unpopular reforms to raise taxes, scrap energy subsidies and privatize state enterprises.

“We are grateful to the cooperation of the official creditor committee… for agreeing in principle to the debt restructuring process,” junior finance minister Shehan Semasinghe said.

The island nation of 22 million people defaulted on its $46 billion external debt last year after running out of foreign exchange to finance imports such as food, fuel and medicines.

The country went to the IMF and secured the rescue loan spread over four years with the first instalment of $330 million paid in March.

With Tuesday’s decision, Sri Lanka has received about $670 million of the full loan of nearly $3.0 billion.

‘Commendable progress’

Last month, Colombo announced it had struck an “agreement in principle” with its lenders, including China, to restructure nearly $6 billion in bilateral loans, a key to pressing ahead with IMF funding.

The finance ministry did not disclose details, but said the deal included a mix of extending the tenure and reducing interest on bilateral loans.

China had been reluctant to take a haircut on its loans and instead had offered to extend the terms and lower interest rates.

The IMF said Sri Lankan authorities had made “commendable progress” toward restoring debt sustainability, raising revenue, rebuilding reserves, reducing inflation and safeguarding financial stability.

Inflation, which peaked at nearly 70 percent in September last year, had eased to 1.5 percent last month.

At the height of last year’s economic crisis, civil unrest forced the ouster of then-president Gotabaya Rajapaksa when protesters stormed his residence.

His successor Ranil Wickremesinghe has doubled taxes, withdrawn generous energy subsidies and raised prices of essentials to shore up state revenue.