The Extended Fund Facility of the International Monetary Fund (IMF) would provide the loan to help with the country’s financial woes. Distribution is contingent on negotiations between the Sri Lankan government and the country’s creditors yielding a plan to restructure the debt and offer debt relief.

Sri Lanka is also encouraged to make changes that will reduce corruption and increase financial transparency as part of the plan.

In the midst of a major crisis, Sri Lanka has been struggling. “vulnerabilities have developed due to insufficient external buffers and an unsustainable public debt dynamic,” Peter Breuer and Masahiro Nozak of the IMF wrote in a press statement. They went to Sri Lanka last week and were in charge of the trip.

As a result of the debt embargo in April, Sri Lanka stopped making payments on its international loans. Since then, the country’s dwindling foreign reserves have made it impossible to import essential necessities like petrol, severely slowing the economy.

IMF predicts 8.7% economic contraction for Sri Lanka in 2019 due to above 60% inflation.

According to Breuer and Nozak of the IMF, the poor and the vulnerable have been hit the worst. The money will be used to restore financial stability, safeguard the livelihoods of Sri Lankans, and pave the way for economic growth and recovery.

According to the IMF, the new loan is contingent to the approval of management and the IMF’s executive board. A successful debt reorganisation by the Sri Lankan government, including agreements with foreign creditors to reduce debt, is a prerequisite for the loan to be approved, the statement reads.

As a result, the IMF relies on financing guarantees that have been agreed upon and that demonstrate Sri Lanka’s ability to repay its debts. To get funding from the IMF, the local government must prove that it has made genuine attempts to reach a mutually beneficial deal with all private creditors.

Sri Lanka owes more than $50 billion to the World Bank and other countries, such as China and Japan, according to the country’s central bank.

In a press conference on Thursday, Breuer said that the agreement shows the Sri Lankan government’s commitment to major adjustments that the IMF would monitor.

According to Breuer, this is a credible way to show Sri Lanka’s creditors that the country is committed to making changes.

They have assured their creditors that they would be able to resume making payments, and the international committee has confirmed this.

Since any delays would prohibit the IMF from providing money and deepen the island nation’s financial troubles, Breuer urged Sri Lanka’s creditors to engage with Sri Lanka in the negotiation process.

If the IMF agrees, Nozak says the initial infusion of cash would happen at the time of approval, and the rest of the money would be doled out during the course of the EEF programme run by the IMF. At the beginning of each payment period, we’ll take a look at what we’ve paid out so far.

Additionally, the finance scheme helps Sri Lanka increase revenue and execute significant tax modifications, such as boosting corporation and VAT taxes and making tax rates more progressive.

The plan’s end goal is to help the Sri Lankan government achieve a budget surplus of 2.3% of GDP by 2024. The deficit is projected to reach 9.8 percent of GDP in 2022.

Nozak pointed out that Sri Lanka had very low tax collection, but that any additional taxes needed to come from the wealthy in order to defend the poor and powerless.

The IMF plans to reduce the nation’s 64.3% inflation rate by allowing the central bank more authority and adapting monetary policy depending on the data collected. The IMF has said that a new Central Bank Act is necessary.