COLOMBO: Sri Lanka must speed up debt restructuring with key bilateral lender China and other creditors to sustain a recovery from its worst economic crisis, the International Monetary Fund said Thursday.

Sri Lanka defaulted on its $46 billion external debt in April 2022 after the country ran out of foreign exchange to finance even essential imports such as food, fuel and medicine.

Months of protests forced the then president Gotabaya Rajapaksa to step down after being accused of corruption and mismanagement.

The IMF said it had reached a staff-level agreement with Colombo to clear the way for the release of $337 million, the third instalment out of a four-year $2.9 billion bailout.

The IMF said the “critical” next steps were to finalise agreements with creditors.

IMF, Sri Lanka reach staff-level agreement on second review of bailout package

Beijing accounts for around 10 percent of the island’s total foreign debt.

China had agreed “in principle” to restructure Sri Lanka’s debt in December, but neither Colombo nor Beijing had given details and the two are yet to finalise an agreement.

President Ranil Wickremesinghe has raised sales and personal income taxes, cut energy subsidies and pushed reforms and austerity measures in line with the IMF rescue deal.

“The economic situation is gradually improving,” the IMF said in a statement. “Sustaining the reform momentum is critical”. It noted that Sri Lanka recorded a modest 1.6 percent and 4.5 percent year-on-year growth in the third and fourth quarters of last year after contractions since the first quarter of 2022.

Wickremesinghe announced late Wednesday he expected the economy to make a full recovery after June.

He expected the rupee to strengthen at 280 to the US dollar, up from the 360 rupees at the height of the crisis.

Wickremesinghe said earlier this month he expects a moratorium on foreign debt payments till 2028.

Sri Lanka’s annual debt servicing is officially estimated at $6.0 billion.

Its foreign debt stood at $52.65 billion at the end of September 2023, according to central bank figures.