IMF approves third review of Sri Lanka's $2.9 billion bailout

The International Monetary Fund (IMF) approved the third review of Sri Lanka's $2.9 billion bailout on Saturday but warned that the economy remains vulnerable.

In a statement, the global lender said it would release about $333 million, bringing total funding to around $1.3 billion, to the crisis-hit South Asian nation. It said signs of an economic recovery were emerging.

In a note of caution, it said "the critical next steps are to complete the commercial debt restructuring, finalize bilateral agreements with official creditors along the lines of the accord with the Official Creditor Committee and implement the terms of the other agreements. This will help restore Sri Lanka's debt sustainability."

Cash-strapped Sri Lanka plunged into its worst financial crisis in more than seven decades in 2022 with a severe dollar shortage sending inflation soaring to 70 per cent, its currency to record lows and its economy contracting by 7.3 per cent during the worst of the fallout and by 2.3 per cent last year.

"Maintaining macroeconomic stability and restoring debt sustainability are key to securing Sri Lanka's prosperity and require persevering with responsible fiscal policy," the IMF said.

The IMF bailout secured in March last year helped stabilise economic conditions. The rupee has risen 11.3 per cent in recent months and inflation disappeared, with prices falling 0.8 per cent last month.

The island nation's economy is expected to grow 4.4 per cent this year, the first increase in three years, according to the World Bank.

However, Sri Lanka still needs to complete a $12.5 billion debt restructuring with bondholders, which President Anura Kumara Dissanayake aims to finalise in December.

Sri Lanka will enter into individual agreements with bilateral creditors including Japan, China and India needed to complete a $10 billion debt restructuring, Dissanayake said.

He won the presidency in September, and his leftist coalition won a record 159 seats in the 225-member parliament in a general election last week.

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