The International Monetary Fund (IMF) has agreed to provide Sri Lanka with a $3 billion bailout as it navigates its worst economic crisis since gaining independence. The agreement, which has been in development for almost a year, is a lifeline for the nation, which has billions of dollars in loans.

The government will raise money, according to foreign minister Ali Sabry, who told the media that the national airline will be privatized and state-owned businesses will be restructured.

Analysts cautioned that Sri Lanka still has a difficult road ahead of it.

The pandemic, rising energy costs, populist tax cuts, and inflation of more than 50% have all taken a significant toll on the nation’s economy.

A lack of food, fuel, and other necessities also contributed to the cost of living reaching record levels, sparking widespread demonstrations that led to the overthrow of the current government in 2022.

As a result, in May of last year, the nation made its first-ever default on its debts to foreign lenders.

“We have lived beyond our means. Whether we like it or not, these difficult measures which may be very unpopular need to be taken,” Mr Sabry said in an interview before the funding was announced.

“Luckily, most [people] other than politically-motivated unions have understood that. I know they are not happy, but they also understand we have no choice,” Mr Sabry added.

The nation introduced income taxes for professionals earlier this year that range from 12.5% to more than 36%. In order to pay for essential purchases like food and fuel, it also increased other taxes.

This stands in stark contrast to the significant tax cuts that the former president of Sri Lanka, Gotabaya Rajapaksa, implemented in 2019, which cost the government more than $1.4 billion annually.

“Sri Lanka still faces a long road toward consolidation of its government balance sheet, consistent economic growth, and external stability,” said Andrew Wood, analyst at S&P Global Ratings.

“We expect the economy to contract again in 2023, albeit at a more modest pace, before returning to growth in 2024.”

The IMF claimed earlier this month that all of Sri Lanka’s significant creditors, including China and India, had provided financing assurances, clearing the way for the bailout.

Sabry argued that it was “a little premature” to speculate on whether China, Sri Lanka’s largest bilateral lender, would be willing to forgive some of the nation’s debts.

“We have the will to pay, but we don’t have the capacity to pay. What we are now trying to do is get that capacity back,” he said.

“That’s going to be a very difficult and serious discussion.”

By the end of 2022, the Sri Lankan government had initially hoped to reach an agreement on a new payment schedule with China and India. Beijing has lent Sri Lanka about $7 billion, while it owes India about $1 billion.

(Adapted from NikkeiAsia.com)

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