- Loan is extended to help stabilise country’s finance sector, following sovereign debt and economic crises
- Subprogram I targets short-term stabilisation and crisis management measures implemented in 2023
- Subprogram II will focus on structural reforms and long-term actions to restore growth in banking sector
The Asian Development Bank (ADB) announced yesterday the approval of a US $ 200 million concessional loan to Sri Lanka, under the Financial Sector Stability and Reforms Programme.
The loan is extended to help stabilise the country’s finance sector, following the sovereign debt and economic crises that started in April 2022, when it suspended its external debt payments.
The Financial Sector Stability and Reforms Programme comprises two subprograms of US $ 200 million each. Subprogram I targets short-term stabilisation and crisis management measures that were implemented in 2023, while Subprogram II is planned to be implemented in 2024. The latter focuses on structural reforms and long-term actions to restore growth in the banking sector.
The programme will help strengthen the stability and governance of the country’s banking sector, improve the banking sector’s asset quality and deepen sustainable and inclusive finance, particularly for women-led micro, small and medium-sized enterprises. According to the International Monetary Fund’s (IMF) latest review, Sri Lanka’s economy is showing tentative signs of stabilisation, although a full economic recovery is not yet assured.
“The programme’s overarching development objective is fully aligned with the country’s strategy of maintaining finance sector stability, while ensuring that the banks are well-positioned for eventual recovery,” said ADB Country Director for Sri Lanka Takafumi Kadono.
“The expected development outcome is a stable financial system providing access to affordable finance for businesses in various sectors of the economy,” he said in the announcement.
The programme is a follow-on assistance from the ADB’s crisis response, under the special policy-based loan that was approved for Sri Lanka in May 2023. It is aligned with the fourth pillar of the IMF’s Extended Fund Facility provided to Sri Lanka, to help the country regain financial stability.
It is also in line with the government’s reform agenda, including strengthening the operational independence of the Central Bank of Sri Lanka (CBSL) and its designation as the country’s macroprudential authority.
In designing this Subprogram I loan, the ADB has maintained close coordination and collaboration with the IMF to design targeted regulatory reforms for the banking sector—including the asset quality review—and with the World Bank on strengthening the deposit insurance scheme.
The loan is accompanied by a US $ 1 million grant from the ADB’s Technical Assistance Special Fund, to provide advisory, knowledge and institutional capacity building for Sri Lanka’s Finance Ministry and CBSL.