Sri Lanka, Its Economy Reeling, Is Approved for $3 Billion Rescue Loan

The executive board of the International Monetary Fund approved a loan worth $3 billion to help Sri Lanka through the financial crisis that has had the nation in a rolling economic and political crisis for more than a year.

The I.M.F. had agreed in principle to extend the funds last September — subject to Sri Lanka’s meeting a series of conditions that included tightening its finances and renegotiating the terms of repaying debt it owes to the biggest economies in Asia.

Even before the announcement was made, late on Monday by a finance minister in the capital, Colombo, markets had breathed a sigh of relief. Sri Lanka’s stock market has jumped 6 percent this month, its bonds have gained 20 percent this year, and its currency, the rupee, ceased sliding against the dollar.

The Sri Lankan economy remains in a precarious state, however: Last month, inflation ran at 50.6 percent, barely a point lower than in January. An initial $330 million from the I.M.F., a global institution that works to shore up troubled countries’ economies, will soon start reaching Sri Lanka’s central bank. Other tranches of hard currency, desperately sought by Sri Lanka, will follow over the next several months.

Ordinary Sri Lankans, no less so than the investors and private lenders with money on the line, hope that rock bottom has been reached and that the I.M.F. support will mark the beginning of their country’s recovery.

As it typically does when it lends money, the fund pushed the government of Sri Lanka to change a number of policies in pursuit of financial stability, for example by broadening the base of individuals and companies that pay taxes and reducing official subsidies on imported goods.

The government has been led by President Ranil Wickremesinghe since the former president, Gotabaya Rajapaksa, and his family, who led Sri Lanka into the crisis, were forced from power last July. Mr. Wickremesinghe’s administration has made fitful progress toward meeting those targets over the past five months. More significantly, it has restructured its bilateral debt after having tricky meetings with Japan, then India and finally China — its main international creditors.

After China agreed to a two-year moratorium on Sri Lanka’s debt payments, things started looking up for I.M.F. approval. One other positive turn: Tourist arrivals devastated by the pandemic are recovering even more quickly than anticipated, back up to an expected 1.5 million this year (before the pandemic, roughly two million visited the country).

This time last year, Sri Lankans were facing 12-hour-long power cuts on a daily basis, waiting in lines for fuel that stretched miles, as well as shortages of food and medicine.

A year later conditions have improved, albeit at an agonizing pace. The fuel lines are, for now, a thing of the past, and after a recent increase in electricity prices, power outages have ended. Cooking gas has become readily available again.

However, despite progress and increases in foreign-exchange reserves, the government was still struggling to find the dollars to import drugs and other medical necessities.

With the help of Chinese loans, over the past 15 years Sri Lanka had built enormous infrastructure projects near the Rajapaksas’ home, in Hambantota, including an international airport and one of the biggest shipping ports in the region; they attract only a small fraction of the volume for which they were designed. When the crisis began early last year, Mr. Rajapaksa ordered the printing of more money, while monetary policy hung loose.

Not all of Sri Lanka’s problems were caused by long-term mismanagement. In announcing its loan, the I.M.F. offered a mixed judgment: “The economy is facing significant challenges stemming from pre-existing vulnerabilities and policy missteps in the lead-up to the crisis, further aggravated by a series of external shocks.”

There were also short-term blunders inflicted by the Rajapaksas, starting with a disastrous organic-only farming policy. But then the acute pain caused by the pandemic, which disrupted remittances sent back by Sri Lankans working abroad, has eased. Finally, the war in Ukraine, which drove up the prices of food and fuel worldwide, pulled the rug out from under Sri Lanka’s currency — the country relies on imports to fulfill many of its basic needs. The Sri Lankan rupee had traded at 202 to the dollar in February 2022; now it is at 345 rupees.

The good news from the I.M.F. comes at an otherwise difficult time for Mr. Wickremesinghe, 73. A veteran of Sri Lankan politics, he served as prime minister six times before taking the country’s top office, during the moment of chaos when the Rajapaksas were toppled. But his party holds only a single seat in Parliament and he depends on support from the Rajapaksas’ party to govern. He has nonetheless managed to push through some of the tough changes that the I.M.F. demanded, allowing the rupee to float within a wider “trading band,” for instance, and asking China to take a haircut on its loans.

But he cannot risk others, like privatizing money-losing state-owned firms, which would aggravate trade unions already striking against his government. Mr. Wickremesinghe is pleading with the country’s election commission to postpone local races, which might reveal his weakness in the face of an angry and resurgent opposition, on the grounds that printing ballots and having a vote would simply cost too much money.