By Susitha Fernando

Colombo, Sep 1 (IANS): After a week-long discussion with Sri Lankan authorities, the International Monetary Fund (IMF) has agreed to provide a $2.9 billion extended facility for a four-year period, with conditions on debt restructuring and action on corruption.

The IMF mission led by Peter Breuer and Masahiro Nozaki who were in the island nation from August 24 to September 1. They extensively discussed IMF's support for Sri Lanka and the authorities' comprehensive economic reform programme.

"The new EFF arrangement will support Sri Lanka's program to restore macroeconomic stability and debt sustainability, while safeguarding financial stability, reducing corruption vulnerabilities and unlocking Sri Lanka's growth potential," the IMF announced in a statement.

Facing the worst-ever economic crisis since Sri Lanka gained independence from Britain in 1948, the island nation is going through skyrocketing inflation, dollar crunch and devaluation of the local currency mainly due to wrong financial decision making and extensive loans obtained for many white elephant projects.

With a colossal $51 billion foreign debt, the country was expected to pay $7 billion in debt serving but defaulted in April this year.

"Sri Lanka has been facing an acute crisis. Vulnerabilities have grown owing to inadequate external buffers and an unsustainable public debt dynamic. The April debt moratorium led to Sri Lanka defaulting on its external obligations, and a critically low level of foreign reserves has hampered the import of essential goods, including fuel, further impeding economic activity," the IMF officials said in a joint statement on Thursday.

The IMF said that the economy is expected to contract by 8.7 per cent in 2022 and inflation recently exceeded 60 per cent, of which the impact has been disproportionately borne by the poor and vulnerable.

"Against this backdrop, the authorities' program, supported by the Fund, would aim to stabilize the economy, protect the livelihoods of the Sri Lankan people, and prepare the ground for economic recovery and promoting sustainable and inclusive growth," the statement added.

Some of the main areas of the IMF-Sri Lanka agreement include raising taxes with an aim to reach a primary surplus of 2.3 per cent of GDP by 2024; introducing cost-recovery based pricing for fuel and electricity; rebuilding foreign reserves through restoring a market-determined and flexible exchange rate; reducing corruption vulnerabilities through improving fiscal transparency and public financial management; and introduce a stronger anti-corruption legal framework.

During its stay in the crisis-hit country, the IMF team met President and Finance Minister Ranil Wickremesinghe, Central Bank Governor P. Nandalal Weerasinghe, Secretary to the Treasury K.M. Mahinda Siriwardana, opposition leader and opposition MPs, representatives from the private sector, civil society organizations and development partners.

Sri Lanka was awaiting an IMF bailout to recover from the financial crisis which has led to the acute shortages of basic essentials like food, fuel and medicine.

India, the closest neighbour, was the first to come in Sri Lanka's aid with nearly $3.8 billion of financial support since January this year.