The IMF on Thursday announced that it will provide Sri Lanka a loan of about USD 2.9 billion over four years under a preliminary agreement to help the bankrupt island nation tide over its worst economic crisis and protect the livelihoods of the people.

Sri Lanka is going through its worst economic crisis since its independence in 1948 which was triggered by a severe paucity of foreign exchange reserves.

"The Sri Lankan authorities and the International Monetary Fund team have reached staff-level agreement to support the authorities' economic adjustment and reform policies with a new 48-month Extended Fund Facility (EFF) with a requested access of about SDR 2.2 billion (equivalent to USD 2.9 billion)," the global lender said in a statement.

The new EFF arrangement will support Sri Lanka's programme to restore macroeconomic stability and debt sustainability, while safeguarding financial stability, reducing corruption vulnerabilities and unlocking the country's growth potential, it said.

The agreement is subject to the approval by IMF management and the Executive Board in the period ahead, contingent on the implementation by the authorities of prior actions, and on receiving financing assurances from Sri Lanka's official creditors and making a good faith effort to reach a collaborative agreement with private creditors, it said.

"Debt relief from Sri Lanka's creditors and additional financing from multilateral partners will be required to help ensure debt sustainability and close financing gaps," the statement said, amid concerns that China would not go along with Western creditors on debt restructuring on an equal footing.

All Sri Lankan creditors, including China, have to agree to restructure their existing loans to the island nation before the IMF starts disbursing the 2.9 billion US dollar loan.

"If one creditor or creditors are not willing to provide these assurances, that would indeed deepen the crisis here in Sri Lanka and would undermine the repayment capacity, Peter Breuer, senior IMF mission chief told reporters here when asked what if China does not agree on a debt restructuring plan.

"Sri Lanka has been facing an acute crisis. Vulnerabilities have grown owing to inadequate external buffers and an unsustainable public debt dynamic," the IMF statement said.

The April debt moratorium led to Sri Lanka defaulting on its external obligations, and a critically low level of foreign reserves has hampered the import of essential goods, including fuel, further impeding economic activity.

The country's economy is expected to contract by 8.7 per cent in 2022 and inflation recently exceeded 60 per cent. The impact has been disproportionately borne by the poor and vulnerable, the IMF noted.

"Against this backdrop, the authorities' programme, supported by the Fund, would aim to stabilise the economy, protect the livelihoods of the Sri Lankan people, and prepare the ground for economic recovery and promoting sustainable and inclusive growth," it said.

Meanwhile, reacting to the IMF deal, Sri Lankan President Ranil Wickremesinghe said it was an important step in the history of the country.

During a meeting with the IMF delegation here, Wickremesinghe, also the finance minister, noted that he considers this to be the beginning of a new economic era where the country is committed to a very competitive export-oriented industry.

"I appeal to the country, let us reorient ourselves to an export-oriented economy which will also make it easier for us to sustain our social services," he said.

He also said that it also should be a beginning for the fact that Sri Lanka should reduce its debts and if possible, even eliminate its debts.

Prime Minister Dinesh Gunawardena said the agreement with the IMF was an "important milestone" in the attempt to revive the country's economy which is faced with a deep recession.

Gunawardena, speaking in Parliament, said the agreement with the IMF would pave the way for the country faced with its worst economic crisis to raise bilateral and multilateral funding from development partners.

He stressed the need for economic reforms, including action to restructure the loss-making state-owned enterprises.

The IMF has also called for action to raise fiscal revenue by implementing tax reforms, introducing cost recovery-based pricing for fuel and electricity, raising social spending to help the poor and the vulnerable in the ongoing economic crisis, restoring flexible exchange rate, a capitalised banking system and a stronger anti-corruption legal framework.

Sri Lanka, a country of 22 million, plunged into a political crisis in July, after former President Gotabaya Rajapaksa fled the country following a popular public uprising against his government for mismanaging the economy.

Rajapaksa was replaced by his ally Wickremesinghe.

The country is also expected to restructure its debt worth USD 29 billion, with Japan expected to coordinate with other creditor nations, including China on this issue.

In mid-April, Sri Lanka declared its international debt default due to the forex crisis. The country owes USD 51 billion in foreign debt, of which USD 28 billion must be paid by 2027.

There have been street protests in Sri Lanka against the government since early April due to its mishandling of the economic crisis.

A crippling shortage of foreign reserves has led to long queues for fuel, cooking gas, and other essentials while power cuts and soaring food prices have heaped misery on the people.