According to the IMF, the agreement with Sri Lanka is progressing | Business and Economy News

The IMF has said Sri Lanka must reduce its existing debt to “sustainable” levels before it can receive aid.

The International Monetary Fund reported constructive talks with Sri Lankan officials, raising hopes it could soon grant preliminary approval to a credit facility to ease a crisis in which the country is struggling to pay for its imports.

“Discussions will continue virtually with a view to reaching a staff-level agreement on the EFF agreement in the short term,” the IMF said, referring to the credit agreement, called the Extended Financing Facility. Thursday’s IMF statement followed June 20-30 meetings in Colombo.

A staff-level agreement must precede final approval by the IMF’s board, but so is cooperation from Sri Lanka’s creditors, which is not expected to come quickly.

The Washington-based lender said Sri Lanka needed to reduce its existing debt to “sustainable” levels before it could receive aid.

“Because public debt is assessed as unsustainable, Executive Board approval would require adequate financing assurances from Sri Lanka’s creditors that debt sustainability will be restored,” the IMF said.

Analysts say debt restructuring would be a protracted process, even after the IMF staff-level agreement.

The financial crisis is the worst in decades for the island of 22 million, which has defaulted on some of its foreign debt and needs at least $6 billion in the coming months to stabilize country’s finances, devastated by years of political missteps and the COVID-19 pandemic.

With little money available for imports, the country has dangerously low fuel reserves. The government on Tuesday limited allocations to essential services, such as trains, buses and the health sector, for two weeks.

The IMF said the high budget deficit must be reduced while providing adequate protection for the poor and vulnerable. Revenues were low and deep tax reforms were urgently needed to achieve these goals.

“The statement indicates that a staff-level agreement will come very soon and could encourage bilateral and multilateral lenders to view Sri Lanka positively,” said Udeeshan Jonas, chief strategist at equity research firm CAL. .

“IMF support will help Sri Lanka secure commitments from creditors. The government has made a lot of progress on things that are generally supposed to be supportive of an IMF staff-level deal,” he added.

Colombo has taken steps to raise taxes, put state assets up for sale, and pledged to cut spending to the “bare bones”.

The IMF said other challenges ahead included containing rising inflation, responding to severe pressures on the balance of payments, reducing the country’s vulnerability to corruption and implementing reforms. conducive to growth.