April 9 (Reuters) - The International Monetary Fund reached a staff-level pact with Sri Lanka, which is set to unlock financing of about $700 million once approved, the lender said on Thursday, calling for reforms to be advanced to ensure stability and growth.
The deal comes as the island nation recovers from its worst economic crisis in decades, which led to a foreign debt default in 2022 and a $2.9-billion IMF bailout program.
Sri Lanka's economic reforms have supported the recovery, but it has been
significantly exposed to the Iran war and needs to "build back better" after Cyclone Ditwah, the IMF added.
The Middle East conflict heightened energy prices, disrupted a key air hub for tourists, and affected Sri Lankans working in the region, said Evan Papageorgiou, the IMF's mission chief.
"Advancing reforms is even more critical now to safeguard macroeconomic stability and maintain the economy on a path towards recovery and inclusive growth," the lender said in a statement.
U.S.-Israeli strikes on Iran had disrupted energy flows from the Middle East before Tuesday's ceasefire, crimping supplies and spurring efforts by Asian nations to tackle energy supply shortages and higher prices.
The deal comes as higher energy prices have put pressure on the foreign exchange reserves of Sri Lanka, which has ordered public holidays on Wednesdays, rationed fuel, and raised pump prices by about 35% last month to rein in consumption.
Sri Lanka is in talks with China, India and Russia to ensure uninterrupted fuel supplies, and aims to spend $600 million to buy refined fuel for April.
(Reporting by Chandni Shah in Bengaluru, Hritam Mukherjee in New Delhi and Uditha Jayasinghe in Colombo; Editing by Shri Navaratnam and Clarence Fernandez)
