The International Monetary Fund (IMF) on Friday said it has reached an agreement with Sri Lanka to extend a $1.5 billion loan facility for an extra year, a move some analysts say could allow the government to boost spending ahead of key elections.
The global lender also concluded its fifth review to ensure the terms of its lending facility are being met, allowing it to disburse the sixth tranche of the loan.
Reuters had earlier exclusively reported the IMF agreement on extending the loan program and sixth tranche.
The loan program, known as the Extended Fund Facility (EFF), now stretches to four years, from the originally agreed three in mid 2016.
Manuela Goretti, the head of visiting IMF staff team, in a statement said the team welcomes the authorities' efforts to bring their economic reform program back on track following the political turmoil of late 2018.
"The team reached understandings.... on the fifth review and their request to extend the EFF arrangement for an additional year with the remaining disbursements being evenly spread over this period to allow more time for the completion of the economic reform agenda," Goretti said in a statement.
The IMF has already disbursed over $1 billion of the $1.5 billion loan.
The global lender also said the island nation's economic growth is expected to improve to about 3.5 percent this year, speeding from 3 percent last year and urged the central bank to be ready to tighten monetary policy if inflationary pressures re-emerge.
The loan is crucial for Sri Lanka, which plans to sell up to $3 billion of bonds as early as next week and needs the IMF program to continue to ensure more attractive borrowing terms.
"This is very positive when the government goes for the sovereign bond," said Dimantha Mathew, head of research at broker First Capital Holdings.
"Extended time for targets considering election year also gives space for government to face the elections. With this, investors would be very comfortable coming to Sri Lanka. Markets will also take this as a positive sign."
Sri Lanka is set to hold presidential elections later this year, followed by parliamentary polls in 2020.
The IMF in November said it had delayed the program until it had more clarity on the political situation, after President Maithripala Sirisena abruptly sacked his prime minister Ranil Wickremesinghe in a move that was later ruled unconstitutional. Wickremesinghe was later reinstated.
Sri Lanka is struggling to repay its foreign loans, with a record $5.9 billion due this year, including $2.6 billion in the first three months. It used its reserves to repay a $1 billion sovereign bond loan in January.
It was designed to avert a financial crisis and support the economic reform agenda of the Sirisena-led coalition government of the Sri Lanka Freedom Party (SLFP) and Wickremesinghe's centre-right United National Party (UNP).