The International Monetary Fund (IMF) approved the second review of Sri Lanka’s $2.9 billion bailout, but the global lender warned the economy remains vulnerable despite signs of recovery and urged Colombo to do more to restructure a hefty debt burden.

In a statement on Wednesday, the IMF said it will release about $336 million to the crisis-hit country and noted that signs of an economic recovery were emerging.

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However, in a note of caution, it said the economy “is still vulnerable and the path to debt sustainability remains knife-edged.”

The IMF called for a swift finalization of the Memorandum of Understanding (MoU) with the Official Creditor Committee (OCC), which includes key lenders Japan and India, and final agreements with the Export-Import Bank of China.

Cash-strapped Sri Lanka plunged into its worst financial crisis in more than seven decades in 2022 after its foreign exchange reserves sank to record lows.

A severe dollar shortage in the country sent inflation soaring to a high of 70%, its currency into freefall and the economy into a sharp 7.3% contraction.

The IMF bailout secured in March last year helped stabilise economic conditions somewhat.

The rupee currency has risen 7% in recent months and inflation slowed to 0.9% in May, though demand remains soft and the debt restructuring talks are keeping markets on edge.

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Approval of the second review “signifies the continued commitment to our economic recovery and growth which is critical in reinforcing economic stability and resilience,” Sri Lanka’s State Minister of Finance Shehan Semasinghe wrote on platform X.

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The economy is starting to recover, inflation remains low, revenue collection is improving, and reserves continue to accumulate, the IMF said it is statement.

But “important vulnerabilities” associated with ongoing debt restructuring, revenue mobilization, reserve accumulation, and banks’ ability to support the recovery continue to cloud the outlook, it said.

“Directors underscored that restoring fiscal sustainability requires additional revenue measures underpinning the 2025 budget, further tax administration reforms, as well as limiting tax exemptions and making them more transparent,” the statement added.

The IMF warned of potential domestic risks from “waning reform momentum,” if consistent policies are not adhered to.

Sri Lanka will hold presidential elections before mid-October, and opposition parties have said they may review current government policies on taxation and IMF programme targets if they win.