The International Monetary Fund reported constructive talks with Sri Lankan authorities on Thursday, raising hopes it could soon grant preliminary approval for a credit facility to alleviate a crisis in which the country is struggling to pay for imports.
"The discussions will continue virtually with a view to reaching a staff-level agreement on the EFF arrangement in the near term," IMF said, referring to the credit arrangement, called an extended fund facility.
Staff-level agreement must precede final approval by the IMF's executive board, but so too must cooperation from Sri Lanka's creditors, which is not expected to come quickly.
"Because public debt is assessed as unsustainable, Executive Board approval would require adequate financing assurances from Sri Lanka's creditors that debt sustainability will be restored," the IMF said.
Analysts say debt restructuring would be a protracted process, even after IMF staff-level agreement.
The financial crisis is the worst in decades for the island of 22 million people, which has defaulted on some foreign debt.
With little money available for imports, the country has dangerously low fuel reserves. The government on Tuesday restricted allocations to essential services, such as trains, buses and the health sector, for two weeks.
The IMF said the high fiscal deficit had to be reduced while ensuring adequate protection for the poor and vulnerable. Since revenue was weak, far-reaching tax reforms were urgently needed to achieve these objectives.
"The statement indicates staff-level agreement will come in very soon and could activate bilateral and multilateral lenders to look at Sri Lanka positively," said Udeeshan Jonas, chief strategist at equity research firm CAL.
"IMF support will help Sri Lanka get commitments from creditors. The government has made a lot of progress on things which are generally supposed to be in favor of an IMF staff level agreement," he added.
The IMF said other challenges that needed addressing included containing rising inflation, attending to severe balance of payments pressures, reducing the country's vulnerability to corruption, and undertaking growth-enhancing reforms.