Courtesy Investing.com

Sri Lanka’s agreement with the International Monetary Fund (IMF) for the next tranche of funds under a $3 billion lending program has been stalled, threatening to slow down the island nation’s recovery from its worst economic crisis in history.

The IMF team concluded a two-week visit to Sri Lanka on Wednesday without securing the staff-level agreement required to unlock the next $333 million disbursement. Despite Sri Lanka’s “commendable progress” in implementing economic reforms, measures to improve tax and revenue collection fell short of expectations, potentially undermining the government’s ability to provide essential public services and sustain debt.

The delay in agreement comes amidst Sri Lanka’s ongoing process of restructuring both its foreign and domestic debt, which was a condition for continuing with the IMF program. As of the end of 2022, both foreign and domestic debt totalled about $42 billion each.

In addition to these internal challenges, progress on negotiations has also been slowed due to tensions between Sri Lanka’s creditors, including geopolitical rivals such as China and India along with commercial bondholders.

Sri Lanka defaulted on its foreign debt last year following a sharp fall in its foreign reserves, leading to mass protests and shortages of essential goods such as fuel and medicine. This marked the first default by an Asia-Pacific nation in over two decades.

The country’s tax-to-GDP ratio plunged to one of the lowest globally at about 8 percent after former president Gotabaya Rajapaksa cut taxes in 2019. His successor, Ranil Wickremesinghe, has since taken a number of unpopular steps including raising some taxes, but according to the IMF, these measures have not met what was required.

“To increase revenues and signal better governance, it is important to strengthen tax administration, remove tax exemptions and actively eliminate tax evasion,” the IMF advised. The Sri Lankan official acknowledged that some reforms had taken longer than expected, but insisted that the country had made good progress in turning around its economy.

IMF Senior Mission Chief for Sri Lanka, Peter Breuerit, stated that disbursing of the second tranche would depend on two critical components: sustaining reforms and progress on the debt front. He also noted that there was no fixed timeline for the second tranche to be disbursed. The IMF mission team, led by Peter Breuer and Ms. Katsiaryna Svirydzenka, emphasized that full economic recovery is not yet assured despite early signs of stabilization.