• The International Monetary Fund (IMF) did not reach a staff-level agreement with Sri Lanka in its first review under a $2.9 billion bailout package, due to a potential shortfall in government revenue generation.

• In March, the IMF approved a $2.9 billion bailout under the Extended Fund Facility (EFF).

• A second tranche of about $330 million under a lending programme would only be released after the IMF reaches a staff-level agreement, and there was no fixed timeline on when that would take place.

• An IMF mission team visited Colombo from September 14 to 27, 2023 to discuss economic and financial policies to support the approval of the first review of the programme under the IMF Extended Fund Facility (EFF) arrangement.

What is Extended Fund Facility?

The IMF has several lending instruments to meet the different needs and specific circumstances of its members.

The Extended Fund Facility (EFF) provides financial assistance to countries facing serious medium-term balance of payments problems because of structural weaknesses that require time to address. To help countries implement medium-term structural reforms, the EFF offers longer program engagement and a longer repayment period.

Crisis in Sri Lanka

• Sri Lanka has been hit hard by a catastrophic economic and humanitarian crisis.

• In April 2022, Sri Lanka declared its first-ever debt default in its history as the worst economic crisis since independence from Britain in 1948 triggered by forex shortages sparked public protests.

• Months-long street protests led to the ouster of the then-president Gotabaya Rajapaksa in mid-July 2022. Rajapaksa had started the IMF negotiations after refusing to tap the global lender for support.

• Sri Lanka introduced painful economic measures such as tax hikes and utility rate hikes to unlock the programme. Trade unions and opposition groups organised protests against such measures.

• The economy is facing significant challenges stemming from pre-existing vulnerabilities and policy missteps in the lead-up to the crisis, further aggravated by a series of external shocks.

• The EFF-supported programme aims to restore Sri Lanka’s macroeconomic stability and debt sustainability, mitigate the economic impact on the poor and vulnerable, safeguard financial sector stability, and strengthen governance and growth potential.

What is the present scenario?

• The people of Sri Lanka have shown remarkable resilience in the face of enormous challenges. Sri Lanka has made commendable progress in implementing difficult but much-needed reforms. 

• These efforts are bearing fruit as the economy is showing tentative signs of stabilisation. 

• Inflation is down from a peak of 70 per cent in September 2022 to below 2 per cent in September 2023. 

• Gross international reserves increased by $1.5 billion during March-June this year, and shortages of essentials have eased. 

• Despite early signs of stabilisation, full economic recovery is not yet assured. 

• Growth momentum remains subdued, with real GDP in the second quarter contracting by 3.1 per cent on a year-on-year basis and high-frequency economic indicators continuing to provide mixed signals. 

• The government has made steady progress on structural reforms. Key legislations passed in Parliament, including the new Central Bank Act and the Anti-Corruption Act, could improve governance if implemented effectively.

• A new welfare benefit payment scheme was enacted with new eligibility criteria that aims to improve targeting, adequacy, and coverage of social safety nets. 

• To ensure financial stability, steps were taken on conducting bank diagnostics, developing a roadmap for addressing banking system capital and liquidity shortfalls, and improving the bank resolution framework.

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