IMF reaches staff-level deal with Sri Lanka for $345 million in financing

The International Monetary Fund has reached a staff-level agreement with Sri Lanka on the seventh review of its Extended Fund Facility, paving the way for financing of about $345 million as the island nation continues its recovery from its worst economic crisis in decades.

The agreement is subject to approval by the IMF's executive board. It also hinges on Sri Lanka's 2027 budget, which is due to be presented in parliament next month, being in line with the terms of the programme, as well as the completion of a review of financing assurances.

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The IMF said the financing assurances review will confirm contributions from multilateral partners and assess whether progress on Sri Lanka's debt restructuring is sufficient.

Once the review is completed and the executive board approves the disbursement, Sri Lanka will have access to an amount equivalent to about $345 million in the IMF's special drawing rights. That would take total disbursements under the programme to about $2.7 billion, the IMF said in a statement on Sunday.

Sri Lanka has been backed by a $2.9-billion IMF programme as it works to recover from the economic upheaval of 2022, when a severe shortage of foreign exchange left the country struggling to pay for essential imports and servicing its debt.

In May, the IMF approved a $700-million double tranche under the programme to help strengthen Sri Lanka's reserves. At the time, the Fund forecast the economy would grow 3% this year.

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The IMF said Sri Lanka's recovery still faces downside risks, including uncertainty surrounding the war in the Middle East, global trade conditions and the impact of the El Nino weather phenomenon.

The island nation, which imports all of its fuel, is particularly exposed to swings in international energy prices. The IMF urged the government to allow domestic fuel prices to adjust in line with international rates while ensuring that vulnerable sections of the population are protected.

The latest agreement marks another step in Sri Lanka's efforts to stabilise its economy, rebuild reserves and complete the debt restructuring process that has been central to its recovery programme.