Sri Lanka receives a $2.9 billion IMF bailout.

The International Monetary Fund (IMF) has approved a $2.9 billion (£2.3 billion) bailout for Sri Lanka, which is facing its worst economic crisis since independence.

The agreement, which has been in the works for nearly a year, is a lifeline for the country, which has billions of dollars in loans.

According to Foreign Minister Ali Sabry, the government plans to raise funds by restructuring state-owned enterprises and privatizing the national airline.

Analysts, however, warn that Sri Lanka faces a difficult road ahead.

The pandemic, rising energy prices, populist tax cuts, and more than 50% inflation have all had a significant impact on the country’s economy.

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A lack of medicines, fuel, and other necessities also contributed to record-high living costs, sparking nationwide protests that overthrew the ruling government in 2022.

As a result, for the first time in its history, the country defaulted on its debts to international lenders last May.

“We lived above our means. “Whether we like it or not, these difficult and potentially unpopular measures must be implemented,” Mr Sabry said in an interview before the funding was announced.

“Fortunately, most [people] other than politically motivated unions have recognized this. “I know they’re upset, but they also understand we don’t have a choice,” Mr Sabry added.

The country imposed income taxes on professionals earlier this year, ranging from 12.5% to more than 36%.

It also increased other taxes to fund critical purchases such as fuel and food.

This is in stark contrast to the large tax cuts implemented by former Sri Lankan President Gotabaya Rajapaksa in 2019, which cost the government more than $1.4 billion (£1.14 billion) per year.

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“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 anticipate that the economy will contract again in 2023, albeit at a slower pace, before returning to growth in 2024.”

The IMF announced earlier this month that Sri Lanka had received financing assurances from all of its major creditors, including China and India, paving the way for the bailout.

Mr Sabry said it was “a little premature” to speculate on whether China, Sri Lanka’s largest bilateral lender, would consider canceling some of the country’s debts.

“We have the will to pay, but we don’t have the capacity to pay. “What we’re trying to do now is reclaim that capacity,” he explained.

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

The Sri Lankan government had hoped to reach an agreement with China and India on a new payment plan by the end of 2022.

Sri Lanka is owed approximately $7 billion (£5.71 billion) by Beijing, while India is owed approximately $1 billion (£820 million).

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