IMF strikes staff-level deal with Sri Lanka on $700m in funding

The International Monetary Fund (IMF) reached a staff-level pact with Sri Lanka, which will unlock financing of about $700 million once approved, the lender said on Thursday, calling for reforms, including in fuel levies, to ensure stability and growth.

The deal comes as the island nation recovers from its worst economic crisis in decades, which led to a foreign debt default in 2022 and a $2.9-billion IMF bailout programme.

Sri Lanka’s economic reforms have supported the recovery, but it has been significantly exposed to the Iran war and needs to “build back better” after Cyclone Ditwah, the IMF added.

The Middle East conflict caused a surge in energy prices, disrupted a key air hub for tourists, and affected Sri Lankans working in the region, said 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.

Sri Lanka will need to raise power tariffs further and carefully manage its finances to navigate the Middle East crisis, the IMF said, adding it could revisit reserve targets under the program to help Sri Lanka pay for higher fuel costs.

US-Israeli war on Iran disrupted energy flows from the Middle East before Tuesday’s ceasefire, crimping supplies and spurring efforts by Asian nations to tackle energy supply shortages and higher prices.

The deal comes as higher energy prices have put pressure on the foreign exchange reserves of Sri Lanka, which has ordered public holidays on Wednesdays, rationed fuel, and raised pump prices by about 35 per cent last month to rein in consumption.

Sri Lanka is in talks with China, India and Russia to ensure uninterrupted fuel supplies, and aims to spend $600m to buy refined fuel for April.