Debt-Stricken Sri Lanka Reaches Initial Deal for I.M.F. Bailout

COLOMBO, Sri Lanka — Sri Lanka and the International Monetary Fund on Thursday reached a preliminary agreement on a bailout package as the bankrupt island nation tries to find a way out of a crippling economic crisis that toppled its president.

The deal, which still requires final approval from the I.M.F.’s executive board, would extend an emergency loan worth $2.9 billion, in return for an overhaul of the country’s economy to reduce its fiscal deficits. The assistance would also be conditioned on engagement by Sri Lanka with creditors like Japan, China and India to restructure its huge foreign debt, on which the country defaulted this year.

“Financing assurances to restore debt sustainability from Sri Lanka’s official creditors and making a good-faith effort to reach a collaborative agreement with private creditors are crucial before the I.M.F. can provide financial support to Sri Lanka,” the organization said in a statement announcing the staff-level agreement on the loan under a 48-month arrangement.

Sri Lanka’s debt crisis reached a climax in the spring, as the South Asian nation of 22 million ran out of foreign reserves for essential imports such as fuel and medicine. After months of sustained protests over the deteriorating conditions, President Gotabaya Rajapaksa, whose family had dominated Sri Lankan politics for much of the past two decades, was forced out in July.

The new president, Ranil Wickremesinghe, has warned of difficult times ahead as he has tried to lay the groundwork for measures that could put the economy back on track.

To reduce government expenses, he has increased the price of electricity and fuel, which were heavily subsidized. As costs for energy imports have ballooned, reaching $500 million in some months, the country has rationed fuel and continued an extensive ban on imports of foreign goods.

In August, inflation for food items reached nearly 94 percent on a year-on-year basis, and transportation costs had increased by nearly 150 percent, according to data released by Sri Lanka’s Central Bank on Wednesday.

Protesters inside the presidential residence after forcing out Gotabaya Rajapaksa in July.Credit…Atul Loke for The New York Times

Sri Lanka’s external debt stands at about $50 billion, a majority of it from multilateral lenders and sovereign bonds. The debt soared in recent years because of large tax cuts and reckless spending on expansive infrastructure projects. The final blow came with the pandemic lockdowns, which deprived the country of billions in overseas remittances as well as tourism revenue.

Japan, one of the main bilateral lenders, has announced its willingness to convene a conference of the creditors to help restructure the debt, but it is not clear when such a meeting would place or whether China would attend.

The two countries, along with India, make up the main bilateral lenders. As Sri Lanka descended into crisis this year and struggled to get new funding, India extended billions of dollars in loans, credit lines and currency swaps.

For months, Sri Lanka’s economic crisis festered as officials in Mr. Rajapaksa’s government remained in denial of the gravity of the situation. Negotiations with the I.M.F. finally began in April in Washington, followed by virtual negotiations and visits by I.M.F. teams.

The discussions focused on reducing Sri Lanka’s fiscal deficits and “designing a comprehensive economic program to correct the macroeconomic imbalances, restore public debt sustainability,” the I.M.F. said.

W. A. Wijewardena, an economist who formerly served as the deputy governor of Sri Lanka’s Central Bank, said some of the required reforms — such as reducing the retirement age or improving tax collection — would be easier for the government to achieve than others.

Privatizing state-owned enterprises that are a burden on the treasury, or shifting the economy to an export-oriented one that would bring Sri Lanka sufficient foreign reserves, are long-term projects that will require overcoming political pushback from powerful unions.

“So unless the government is able to stick to this reform program with a specifically set-out timeline with milestones at each point, I don’t think we will be able to get the country back on the old growth path,” Mr. Wijewardena said.

Skandha Gunasekara reported from Colombo, and Mujib Mashal from Mumbai, India.

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