The IMF has approved a $3 billion bailout programme to help debt-ridden Sri Lanka overcome its economic crisis and catalyse financial support from other development partners, a move welcomed by Colombo on Tuesday as a "historic milestone" in the critical period.

International Monetary Fund's Executive Board approved on Monday a 48-month extended arrangement under its Extended Fund Facility (EFF) with an amount of SDR 2.286 billion (about $3 billion), according to a statement.

Special Drawing Rights (SDR) are supplementary foreign exchange reserve assets defined and maintained by the International Monetary Fund (IMF).

Sri Lanka has been hit hard by a catastrophic economic and humanitarian crisis.

The economy is facing significant challenges stemming from pre-existing vulnerabilities and policy missteps in the lead-up to the crisis, further aggravated by a series of external shocks, the IMF said.

The EFF-supported programme aims to restore Sri Lanka’s macroeconomic stability and debt sustainability, mitigate the economic impact on the poor and vulnerable, safeguard financial sector stability, and strengthen governance and growth potential, said the statement.

The Executive Board’s decision will enable an immediate disbursement equivalent to SDR 254 million (about USD 333 million) and catalyse financial support from other development partners, it said.

Sri Lanka in April declared its first-ever debt default in its history as the worst economic crisis since independence from Britain in 1948 triggered by forex shortages sparked public protests.

Months-long street protests led to the ouster of the then-president Gotabaya Rajapaksa in mid-July. Rajapaksa had started the IMF negotiations after refusing to tap the global lender for support.

Sri Lanka has introduced painful economic measures such as tax hikes and utility rate hikes to unlock the programme. Trade unions and opposition groups have organised protests against such measures.

President Ranil Wickremesinghe on Tuesday welcomed the decision announced by the IMF.

The programme will allow Sri Lanka to access financing of up to $7 billion from the IMF, International Financial Institutions (IFIs) and multilateral organisations, a statement said.

“This is a historic milestone for the country as the government seeks to restore macroeconomic stability and achieve debt sustainability.

Earlier this month, Sri Lanka received IMF-compatible financing assurances from its official creditors, including Paris Club members, India and China, allowing the IMF to convene an Executive Board and consider Sri Lanka’s request for a loan," the statement said.

The Paris Club is an informal group of official creditors whose role is to find coordinated and sustainable solutions to the payment difficulties experienced by debtor countries.

In the 75 years of Sri Lanka’s independence, there has never been a "more critical period" for the country's economic future, the statement said.

"Our official creditors have declared their support following continuous and positive engagements over the last few months," it said.

"From the very start, we committed to full transparency in all our discussions with financial institutions and with our creditors. I express my gratitude to the IMF and our international partners for their support as we look to get the economy back on track for the long term through prudent fiscal management and our ambitious reform agenda,” Wickremesinghe said.

President Wickremesinghe said since taking office last July, it had been his priority to stabilise Sri Lanka’s economy and achieve sustainable levels of debt.

“To do so, we have taken some tough decisions, but we did so with a commitment to widening our social safety nets, protecting the vulnerable, rooting out corruption and ensuring we can grow an inclusive and internationally attractive economy,” he said.

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