The International Monetary Fund announced it reached a staff-level pact with Sri Lanka, which will unlock about USD 700 million in financing when approved, requiring reforms, including in fuel levies, to ensure stability and growth.
The deal comes as the island nation is recovering from its worst economic crisis in decades, which resulted in a foreign debt default in 2022 and a USD 2.9-billion IMF bailout programme.
The IMF noted that Sri Lanka’s economic reforms have supported the recovery, but the country has been “highly vulnerable” to the Iran war and needs to “rebuild better” following Cyclone Ditwah.
The conflict in the Middle East increased energy prices, disrupted a major hub for air travel, and impacted Sri Lankans who work in the region, according to Evan Papageorgiou, the IMF’s mission chief for Sri Lanka.
“The staff-level agreement will go before the IMF executive board at the end of May or early April,” he added.
The IMF said Sri Lanka will have to increase power tariffs further and tightly manage its finances to get through the Middle East crisis, and it could review reserve targets under the programme to assist Sri Lanka to cover higher fuel costs.
Before the ceasefire, US-Israeli strikes on Iran had disrupted energy flows from the Middle East, crimping supplies and prompting Asian nations to address energy supply shortages and higher prices.
The deal arrives as rising energy prices have strained foreign exchange reserves of Sri Lanka, which declared Wednesday’s public holidays, imposed fuel rationing, and raised pump prices by about 35% last month to control consumption.
It is negotiating with China, India and Russia to ensure an uninterrupted fuel supply and hopes to spend USD 600 million to buy refined fuel for April.
Meanwhile, the head of the International Monetary Fund has warned that the Iran war will permanently scar the global economy even if a durable peace deal in the Middle East can be reached.