Sri Lanka is showing “tentative signs of improvement”, the International Monetary Fund has said, while urging the island nation to reach timely restructuring agreements with its creditors, before the first Fund’s first scheduled review in September this year.

An IMF mission conducted a staff visit to Sri Lanka From May 11 to 23, to review implementation of the Fund’s programme aimed at helping Sri Lanka achieve debt sustainability and revive its economy after last year’s economic crash, the worst the country has seen since Independence. In March 2023, the IMF cleared a nearly $3 billion-dollar package for Sri Lanka, asking the country to “step up structural reforms”.

“Following strong policy efforts, the macroeconomic situation in Sri Lanka is showing tentative signs of improvement, with inflation moderating, the exchange rate stabilising, and the Central Bank rebuilding reserves buffers. However, the overall macroeconomic and policy environment remains challenging,” the visiting delegation said in a statement.

Referring to discussions on progress in debt restructuring, the visiting officials noted: “Achieving timely restructuring agreements with creditors in line with the programme targets by the time of the first review is essential to restoring debt sustainability.”

‘Sharing the burden’

Earlier this month, a 17-member “creditor committee” for Sri Lanka, co-chaired by India, Japan and France, met to discuss Sri Lanka’s formal request for debt treatment. China, which is Sri Lanka’s top bilateral creditor — followed by Japan and India — attended the meeting as an observer.

In a statement following the meeting the committee stressed the need for Sri Lanka’s private creditors and other official bilateral creditors to provide a debt treatment plan on terms “at least as favorable as the ones agreed by this creditor committee, in line with the comparability of treatment principle.” While India and the Paris Club have repeatedly underlined creditor parity, China has demanded that private creditors — who hold the largest share of Sri Lanka’s debt — as well as multilateral lenders “share the burden” of a possible haircut. 

The visit of the IMF team coincided, in part, with that of Krishna Srinivasan, Director of Asia and Pacific Department, IMF. In his remarks to the media in Colombo, Mr. Srinivasan highlighted the challenges facing the global economy. “Global growth is expected to decelerate and bottom out in 2023, as rising interest rates and Russia’s war in Ukraine weigh on activity. Global inflation is easing but remains stubbornly high. And banking strains in the U.S. and Europe have injected greater uncertainty into an already complex landscape,” he said.

Sri Lanka’s own economic challenges, however, began manifesting starkly from the beginning of last year, in a balance of payments problem, before rapidly escalating into a meltdown that left citizens without essential supplies for months. The crisis also sparked historic a historic people’s uprising, which dislodged the Rajapaksas from power. 

The government secured the IMF package in March and is hoping to tap other sources of credit but meanwhile, Sri Lanka’s poor are reeling under the impact of high costs of living, stagnant incomes, and joblessness after the economy contracted 7.8 per cent last year. According to an update of the World Bank in April 2023, national poverty doubled to 25 per cent, while urban poverty increased three-fold, to 15 per cent. Multiple reports point to growing starvation and undernourishment among children among Sri Lanka’s poor.

Meera Srinivasan is The Hindu’s correspondent in Colombo