Finally receiving approval from the IMF for a $3 billion rescue package for Sri Lanka, the island nation can now restructure its debt and expect economic growth in 2024.

The IMF’s decision will allow for the immediate disbursement of a $333 million loan over four years to the South Asian nation, which is currently experiencing its worst financial crisis in decades.

Sri Lanka has been “hit hard by catastrophic economic and humanitarian crisis,” Krishna Srinivasan, director of the IMF’s Asia and Pacific department, told CNBC.

“This you can trace back to three factors: One is pre-existing vulnerabilities, policy missteps, and shocks,” he told CNBC.

“In response to that, the economy has contracted quite sharply. We expect a contraction around 8% in 2022, a 3% contraction this year before the economy picks up next year.”

As a result, he continued, Sri Lanka’s debt levels are now unmanageable, and the country’s inflation rate is still high.

“All the macro fundamentals are pretty sobering.”

Tuesday marked the last time the Sri Lankan rupee rose against the dollar by 4.5%.

Since last year, Sri Lanka has experienced severe shortages of food, medicine, fuel, and electricity. This sparked irate demonstrations that ultimately led to Gotabaya Rajapaksa’s resignation and forced him to leave his country.

Ranil Wickremesinghe, a six-time prime minister, was elected president by the nation’s lawmakers in July.

Wickremesinghe thanked the IMF in a tweet in response to the most recent IMF bailout and stated that his nation is dedicated to its “reform agenda,” adding that the IMF program is “critical to achieving this vision.”

According to Srinivasan, the primary goals of the IMF loan are to address “macroeconomic stabilization” and restore short-term debt sustainability.

“But going beyond that, the program also aims to mitigate the impact of the crisis on the poor and vulnerable,” he noted. “It aims to safeguard national stability and strengthen governance,” to improve the country’s growth potential for the longer term.

The IMF’s loan approval is significant for Sri Lanka, which defaulted on its debt last year, according to Gabriel Sterne, head of global emerging markets at Oxford Economics, in an interview with CNBC.

“It’s a big moment, very positive for the country overall as adherence to the program will point a way out of a partly self-induced crisis,” he said. “There are plenty of examples of IMF programs restoring stability, though these often come at the cost of painful austerity.”

“In Sri Lanka’s case the previous government won by a landslide on the platform of dreadful economic policies that made crisis inevitable, which led to changes in ruling politicians under the shadow of social protest,” Sterne added.

According to the economist, “poor governance” and a “lack of incentive to pursue responsible policies” will continue to be issues in the future.

Institutional changes, according to analysts, are necessary for Sri Lanka to achieve long-term debt sustainability.

“Ambitious revenue-based fiscal consolidation is necessary for restoring fiscal and debt sustainability” in Sri Lanka, said Kistalina Georgieva, IMF’s managing director.

“In this regard, the momentum of ongoing progressive tax reforms should be maintained, and social safety nets should be strengthened and better targeted to the poor,” she said in a statement.

“For the fiscal adjustments to be successful, sustained fiscal institutional reforms on tax administration, public financial and expenditure management, and energy pricing are critical.”

She added that the nation should keep up its current efforts to combat corruption, including updating anti-corruption laws.

Sri Lanka will have contacted the IMF for a bailout 17 times total.

In contrast to the previous 16 occasions, Wickremesinghe acknowledged in a recent speech that “there is no room for failure in completing every task agreed upon with the IMF.”

“One of the best predictors of who will have a debt crisis in the future is how many crises you have had in the past, and Sri Lanka may struggle to recover its reputation on international financial markets,” said Oxford’s Sterne.

“Even if the IMF program works out, what will be the discipline on politicians once the IMF leaves?” he added.

However, this crisis is “slightly different than what we have seen in the past,” according to Srinivasan of the IMF.

“There is broad recognition of the fact that debt sustainability needs to be restored. There is broad agreement that this will require both fiscal consolidation on the part of the government,” he said, adding that implementation is key.

“We do see a significant amount of ownership and there has to be a significant amount of leadership, so that there is buy-in for this whole program,” noted Srinivasan.

“This will be something where society at large will have to play an important role, along with all other stakeholders, including the political actors.”

(Adapted from CNBC.com)

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