COLOMBO: Bankrupt Sri Lanka agreed a conditional $2.9 billion bailout with International Monetary Fund negotiators on Thursday, as the island nation seeks to overcome a bruising economic crisis that saw its president flee the country.

Months of acute food, fuel and medicine shortages, extended blackouts and runaway inflation have plagued the country after it ran out of dollars to finance even the most essential imports.

Sri Lanka has defaulted on its $51 billion foreign debt and in July angry protesters stormed the home of then-president Gotabaya Rajapaksa, with the leader subsequently fleeing the island and issuing his resignation from Singapore.

“This is an important step in the history of our country,” said successor President Ranil Wickremesinghe of the IMF deal.

“The beginning will be difficult. But we know as we go on, we can make more progress. It is our commitment that matters now.”

The IMF board will need to ratify Thursday’s staff agreement, which is conditional on the Sri Lankan government striking a deal with creditors to restructure its borrowings.

Creditors needed to help Sri Lanka extricate itself from a “deep crisis” and return to servicing its debt, said the lender’s head of mission Peter Breuer.

“It really is in the interest of all creditors to work with Sri Lanka on this front,” Breuer told reporters, after nine days of talks with government representatives in Colombo.

“If creditors are not willing to provide these assurances, that would indeed deepen the crisis in Sri Lanka and would undermine its repayment capacity.”

China — Sri Lanka’s biggest bilateral lender accounting for more than 10 percent of borrowings — has so far not publicly shifted from its offer of issuing more loans instead of taking a cut on outstanding loans.

Breuer could not say when the IMF financing would become available, but stressed that Sri Lanka’s needs were “urgent” and must be addressed immediately, with additional support from other lenders.

“Additional financing from multilateral partners will be needed to close financing gaps,” Breuer said.

The IMF’s announcement of the $2.9 billion package, spread over four years, is short of the $3-4 billion sought by Sri Lanka.

The government welcomed the announcement but warned the public that painful economic reforms were still necessary.

“We will have to make major sacrifices,” Prime Minister Dinesh Gunawardena told parliament.

Financial analyst W.A. Wijewardena, a former central bank deputy governor, said the government would need to implement more painful reforms to secure funding.

“Debt sustainability is the crucial issue,” he told AFP.

He added that raising government revenue, currently one of the world’s lowest, would be a serious challenge given the current state of the economy.

The central bank expects a record eight percent GDP contraction this year, slightly below the IMF’s forecast of 8.7 percent.

The IMF said Sri Lanka had agreed to increase revenues, remove subsidies, ensure a flexible exchange rate and rebuild its foreign reserves, which had hit rock bottom.

President Wickremesinghe, who took office after his predecessor fled, announced further tax hikes and sweeping reforms this week as part of efforts to bring debt under control.

His government had already raised prices on fuel and electricity more than threefold and removed energy subsidies, a key precondition for the IMF bailout.

The coronavirus pandemic was a hammer-blow to the island’s tourism industry and dried up remittances from Sri Lankans working abroad — both key foreign exchange earners.

Rajapaksa’s government was accused of introducing unsustainable tax cuts that drove up government debt and exacerbated the crisis.

Inflation hit a fresh monthly record in August, with the country’s main benchmark showing average price rises of 64.3 percent, while the rupee has lost more than 45 percent of its value against the greenback this year.

Authorities resisted approaching the IMF for relief until the country’s ballooning debt burden forced a default in April.

At the peak of Sri Lanka’s petrol shortages, motorists had to wait for weeks to top up, although strict fuel rationing has since shortened queues.

Public anger against government mismanagement of the crisis reached fever pitch in July, when protesters stormed Rajapaksa’s official residence and occupied several other government buildings.