By Uditha Jayasinghe
COLOMBO (Reuters) -The International Monetary Fund and Sri Lanka have reached a staff-level agreement on economic policies to conclude the second review of a four-year bailout programme, the global lender said on Thursday.
The review, once approved by the IMF's board, will release $337 million in funding for the island nation.
Sri Lanka defaulted on its overseas debt in May 2022 after a severe shortage of foreign exchange reserves triggered the worst financial crisis since independence from Britain in 1948.
It has since made progress on about $11 billion of bilateral debt restructuring and hopes to have agreements in place with all key creditors, including bondholders, by May at the latest, Foreign Minister Ali Sabry told Reuters last month.
"Macroeconomic policy reforms are starting to bear fruit," the IMF said in the statement.
"Sustaining the reform momentum and addressing governance weaknesses and corruption vulnerabilities are critical to put the economy on a path towards lasting recovery and stable and inclusive growth."
The IMF said Sri Lanka had made progress on implementing its reform agenda with commendable outcomes including rapid disinflation, robust reserve accumulation and initial signs of economic growth.
It said the next steps were to finalise agreements with the official creditors and reach Agreements in Principle with the main external private creditors.
"We look to see swift progress with the outstanding items, in particular reaching an agreement with international creditors, including private bondholders and China EXIM Bank to cement the path to debt sustainability," Peter Breuer, Senior Mission Chief for Sri Lanka told reporters.
Sri Lanka has yet to reach an agreement in principle with bondholders and individual bilateral creditors that include China, Japan, and India. The country said it had shared a fresh debt restructuring proposal with private creditors in mid-February.
Other reforms in the pipeline include reforming state-owned enterprises, increasing public revenue and implementing property taxes.
Sri Lanka's international bonds rallied sharply on Thursday, with the 2028 up more than 2 cents in the dollar at 56.5 cents, Tradeweb data showed. The bonds were buoyed after the U.S. Federal Reserve indicated it would stick to its plan for rate cuts this year and by a report that Sri Lanka bondholders and the government would kick off restructuring talks next week.