IMF clears the way for Sri Lanka to draw $345m

The International Monetary Fund said today (5 October) it had reached a preliminary agreement with Sri Lanka that will allow the country to access about $345 million from its $2.9 billion bailout programme.

The Washington-based lender also warned that higher energy prices, the El Niño climate phenomenon and the Middle East conflict could threaten the country's economic recovery.

The agreement marks the latest milestone in Sri Lanka's recovery from its worst economic crisis, which culminated in a sovereign default on $46 billion in external debt in 2022.

The South Asian nation secured a four-year, $2.9 billion IMF rescue package in 2023.

"Sri Lanka's economy has proved remarkably resilient to successive shocks," the IMF said in a statement, noting that the economy had recorded 11 consecutive quarters of expansion after contracting 7.3% in 2022.

But the country "continues to face downside risks from uncertainty over the duration and intensity of the Middle East war, global trade policy, and the impact of El Niño", it added.

The IMF also criticised the government's decision earlier this month to reinstate a $126 million diesel subsidy, saying fuel prices should continue to adjust in line with international markets while protecting vulnerable households.

It said the central bank should be prepared to tighten monetary policy further if higher energy prices trigger a second round of inflation.

Sri Lanka's central bank recently raised interest rates by 100 basis points to 8.75%, but has resisted calls for further increases, arguing that they could undermine growth.

The latest agreement clears the way for what is expected to be the penultimate disbursement under the programme, which is due to expire in March.

Sri Lankan authorities have yet to decide whether they will seek a new arrangement with the IMF when the programme ends.