The booming Sri Lankan economy will get a boost from the International Monetary Fund as it gets a $3 billion bailout

The International Monetary Fund finally agreed to a 3 billion dollars to save Sri Lankapaving the way for the country to restructure its debt and improve the economy in 2024.

The South Asian country is grappling with its worst financial crisis in decades, and the International Monetary Fund’s decision will allow the immediate disbursement of a $333 million loan over four years.

Sri Lanka has been “severely hit by a catastrophic economic and humanitarian crisis,” Krishna Srinivasan, director of the Asia and Pacific Department at the IMF, told CNBC.

“You can trace this down to three factors: one is pre-existing vulnerabilities, political missteps, and traumas,” he told CNBC’s Sri Jegarajah in an interview early Tuesday in Asia.

“In response to that, the economy has contracted very sharply. We expect a contraction of about 8% in 2022, a contraction of about 3% this year before the economy rebounds next year.”

As a result, he added, Sri Lanka’s debt levels have become unsustainable and inflation remains high.

“All the macroeconomic fundamentals are very realistic.”

The Sri Lankan rupee finally strengthened 4.5% against the US dollar on Tuesday.

Sri Lanka has been experiencing severe shortages of food, medicine, fuel and electricity since last year. This led to angry protests that forced the then President Gotabaya Rajapaksa to flee his country and eventually resign.

In July, the country’s lawmakers chose six-time Prime Minister Ranil Wickremesinghe as the president to succeed him.

Responding to the recent IMF bailout, he thanked Wickremesinghe in a tweet and said his country was committed to the “reform agenda,” adding that the IMF program was “crucial to realizing this vision.”

Srinivasan said the main objective of the IMF loan is to address “macroeconomic stability” and restore debt sustainability in the short term.

“Going beyond that, the program also aims to mitigate the impact of the crisis on the poor and vulnerable,” he noted. It aims to protect national stability and strengthen governance” to improve the country’s long-term growth potential.

The IMF approval of the loan is important for Sri Lanka, which defaulted on its debt last year, Gabriel Stern, head of global emerging markets at Oxford Economics, told CNBC in an interview.

“It is a big moment, and a very positive one for the country in general, that adherence to the program will constitute a way out of a partly self-inflicted crisis,” he said. “There are plenty of examples of IMF programs restoring stability, although these often come at the cost of painful austerity.”

“In the case of Sri Lanka, the previous government won overwhelmingly on the platform of appalling economic policies that made crisis inevitable, leading to changes in ruling politicians in the shadow of social protests,” Stern added.

The economist said that “mismanagement” and what he called a “lack of incentive to pursue responsible policies” remained a concern in the future.

Analysts have also argued that Sri Lanka needs institutional reforms in order to achieve long-term debt sustainability.

IMF Managing Director Kistalina Georgieva said that “ambitious revenue-based fiscal consolidation is necessary to restore fiscal viability and debt sustainability” in Sri Lanka.

“In this regard, the momentum of the ongoing upward tax reforms should be maintained, and social safety nets should be strengthened and better targeted at the poor,” she said in a statement.

“For fiscal adjustments to be successful, sustainable fiscal institutional reforms in tax administration, fiscal management and expenditures, and energy pricing are critical.”

She also said the country’s ongoing anti-corruption efforts must continue, including renewal of anti-corruption legislation.

This will be 17^y The time when Sri Lanka approached the International Monetary Fund for a bailout.

In a recent speech, Wickremesinghe acknowledged that “there is no room for failure to complete every task agreed upon with the IMF, unlike the previous 16 occasions.”

“One of the best predictors of who will face a debt crisis in the future is how many crises it has experienced in the past, and Sri Lanka may struggle to restore its reputation in international financial markets,” said Oxford’s Stern.

“Even if the IMF program succeeds, what will be the discipline on politicians once they leave the IMF?” he added.

Srinivasan of the International Monetary Fund said this is “a slightly different crisis than what we’ve seen in the past”.

“There is wide recognition of the fact that debt sustainability needs to be restored. There is broad agreement that this will require fiscal consolidation on the part of the government,” he said, adding that implementation is key.

“We see a great deal of ownership and there has to be a great deal of leadership, for there to be support for this whole programme,” Srinivasan noted.

“This will be something where society as a whole has to play an important role, along with all the other stakeholders, including political actors.”