Sri Lanka has reached a pivotal agreement with a consortium of international creditors, including China, India, and Japan, to restructure approximately $6 billion of its loans. This accord is a crucial step toward unlocking a $334 million installment from the International Monetary Fund (IMF), part of a larger $2.9 billion bailout package agreed upon earlier this year after the country defaulted on a massive $46 billion debt in April 2022.
The restructuring plan, confirmed by the finance ministry today, includes extending loan tenures and reducing interest rates. The move follows a period of severe economic turmoil for Sri Lanka, which saw inflation skyrocketing to 70% last year before undergoing dramatic tax increases and subsidy cuts under IMF guidance. These stringent measures have contributed to a significant reduction in inflation to just 1.3%.
Despite these efforts and the recent decline in inflation, the full economic recovery for the island nation remains uncertain. The financial crisis had led to widespread civil unrest, culminating in the ouster of President Gotabaya Rajapaksa. The IMF had delayed the disbursement of the second installment of the bailout since September, pending the conclusion of creditor discussions.
The Memorandum of Understanding (MOU) detailing the new debt terms is currently being prepared under the leadership of the Official Credit Committee, co-chaired by representatives from India, Japan, and France. Each creditor country will implement the agreed terms through their respective legal processes.
This breakthrough in debt restructuring is seen as instrumental for Sri Lanka to continue on its path to economic stability and for the IMF to proceed with its planned financial support. The international community has recognized signs of economic recovery, but the IMF continues to stress the need for further tax reform to ensure long-term financial health.
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