IMF Approves $337 Million Second Tranche Loan For Sri Lanka

The International Monetary Fund (IMF) has approved the release of the second tranche, amounting to approximately $337 million, under the Extended Fund Facility (EFF) to Sri Lanka. This financial support is a crucial component of Sri Lanka’s recovery plan, aimed at overcoming the economic challenges resulting from a historic financial crash in the previous year.

Debt Treatment Plan Milestone

Sri Lanka’s debt treatment plan, developed in collaboration with its bilateral creditors, played a pivotal role in securing the IMF’s approval for the second tranche. Agreements-in-principle with the Official Creditors Committee and Export-Import Bank of China regarding debt treatments align with the EFF targets, marking a significant milestone toward placing Sri Lanka’s debt on a sustainable trajectory.

Tranche Details and Total Fund Allocation

With the second tranche now greenlit, Sri Lanka has received a total of around $670 million out of the anticipated $3 billion from the IMF. This financial injection is crucial for the country’s recovery efforts, particularly considering the severe impacts of the financial crisis on citizens, including acute shortages and prolonged power cuts leading to a state of bankruptcy.

Debt Restructuring Agreements

In November, Sri Lanka reached agreements-in-principle with key creditors, such as India and the Paris Club group, which includes Japan, to restructure its debt. China is also reported to have agreed to treat its loans to Sri Lanka on comparable terms. However, details of these agreements have not been made public, emphasizing the importance of promptly completing and signing Memoranda of Understanding with official creditors, according to the IMF.

Focus on Official Lenders and Private Creditors

China, India, and Japan rank as Sri Lanka’s top three bilateral creditors. While significant debt comes from these nations, a substantial portion, accumulated through International Sovereign Bonds (ISBs), is owed to private creditors. The IMF urges Sri Lanka to reach resolutions with both official lenders and external private creditors on comparable terms for a comprehensive debt restructuring.

Progress Toward Debt Sustainability

The IMF acknowledges Sri Lanka’s commendable progress in restoring debt sustainability, increasing revenue, rebuilding reserve buffers, reducing inflation, and safeguarding financial stability. However, the IMF underscores the critical importance of a strong commitment to improving governance and protecting the poor and vulnerable in the face of ongoing austerity measures.

Questions Related to Exams

Q1. What is the total financial support Sri Lanka hopes to receive from the IMF, and how much has it received so far?

A: Sri Lanka aims to receive a total of $3 billion from the IMF. As of now, with the second tranche, the country has received about $670 million.

Q2. What is the largest chunk of Sri Lanka’s debt, and who are the major creditors in this category?

A: The largest chunk of Sri Lanka’s debt comes from International Sovereign Bonds (ISBs), and it is owed to private creditors.

Q3. Which are the top three bilateral creditors for Sri Lanka, and why is their cooperation essential for debt restructuring?

A: China, India, and Japan are Sri Lanka’s top three bilateral creditors. Their cooperation is crucial as they hold a significant portion of Sri Lanka’s debt.