Sri Lankan authorities have made "considerable progress" in formulating an economic reform programme to tackle the financial crisis in the country, the International Monetary Fund said on Thursday.
The lender, however, refrained from committing any financial support to the island nation.
“The authorities’ monetary, fiscal policy and other actions since early April were important first steps to address the crisis," the fund said in a statement after field visits to capital Colombo from June 20-June 30.
"The team had constructive and productive discussions with the Sri Lankan authorities on economic policies and reforms to be supported by an IMF Extended Fund Facility [EFF] arrangement. The staff team and the authorities made significant progress on defining a macroeconomic and structural policy package."
However, because Sri Lanka's public debt is assessed as "unsustainable", the IMF's executive board approval for the credit facility would require "adequate financing assurances" from the country's creditors that debt sustainability will be restored, the Washington-based lender said.
Discussions will continue virtually "with a view to reaching a staff-level agreement on the EFF arrangement in the near term", it said.
Sri Lanka is experiencing its worst economic crisis since independence in 1948 and needs at least $6 billion over the next six months to stay afloat due to a severe shortage of foreign currency required to buy essentials such as fuel and medicine.
The island nation of 22 million people has fallen into default for the first time in its history after a 30-day grace period expired following missed interest payments on some of its sovereign bonds.
Sri Lanka’s prime minister last week admitted its economy had “completely collapsed”.
“We are now facing a far more serious situation beyond the mere shortages of fuel, gas, electricity and food,” Ranil Wickremesinghe told the Parliament. "Our economy has completely collapsed. That is the most serious issue before us today."
Headline inflation soared last month amid continuing food and fuel shortages, with consumer prices in Colombo up 39.1 per cent year-on-year, official data indicated.
The government this week said distribution of fuel will be limited to essential services until July 10 and urged residents to stay at home.
“Sri Lanka is going through a severe economic crisis," the IMF said. "The economy is expected to contract significantly in 2022, while inflation is high and rising.
"The critically low level of foreign reserves has hampered the import of essential goods. During the in-person visit, the team witnessed some of the hardships currently faced by the Sri Lankan people, especially the poor and vulnerable who are affected disproportionately by the crisis. We reaffirm our commitment to support Sri Lanka at this difficult time in line with the IMF’s policies."
The country will need to design a comprehensive economic programme, the lender said, to correct the macroeconomic imbalances, restore public debt sustainability and realise Sri Lanka’s growth potential.
"Discussions advanced substantially during the mission, including on the need to reduce the elevated fiscal deficit while ensuring adequate protection for the poor and vulnerable," the IMF said.
"Given the low level of revenue, far-reaching tax reforms are urgently needed to achieve these objectives.
"Other challenges that need addressing include containing rising levels of inflation, addressing the severe balance of payments pressures, reducing corruption vulnerabilities and embarking on growth-enhancing reforms."