The International Monetary Fund approved Sri Lanka's request for a $2.9 billion bailout, raising hopes for an easing of its economic crisis.
The IMF's board confirmed that it had signed off on the loan, clearing the way for the release of funds and kicking off a four-year programme designed to shore up the economy.
The IMF managing director, Kristalina Georgieva, warned that Colombo must pursue tax reform and greater social safety nets for the poor and rein in corruption that has been partly blamed for the crisis.
The president of Sri Lanka, Ranil Wickremesinghe, said in a statement on Monday: "I express my gratitude to the International Monetary Fund and our international partners for their support in order to get the economy back on track for the long term through prudent fiscal management and our ambitious reform agenda. Sri Lanka defaulted on its foreign debt in April 2022, which plunged into its worst economic downturn since independence because of a shortage of foreign currency reserves.
The Indian Ocean country of around 22 million people ran out of cash to finance the most essential imports. The president Gotabaya Rajapaksa resigned in July due to widespread protests over economic mismanagement, acute shortages of food, fuel and medicines, and runaway inflation.
Wickremesinghe took over Rajapaksa as president and implemented tough spending cuts and tax hikes in order to secure the help of the International Monetary Fund. The bailout was provisionally approved by the International Monetary Fund in September, but the final approval was held up until China, Sri Lanka's biggest bilateral lender, agreed to restructure its loans to Colombo.
Beijing had said this year it was offering a two-year moratorium on its loans to Sri Lanka, but the concession fell short of the IMF expectations for the sustainability of the island's debt. After China agreed to restructure its loans, Wickremesinghe said that the first tranche of the IMF package would be available within the month.
Colombo will be banking on the IMF deal to unfreeze billions of dollars in foreign aid for projects suspended since Sri Lanka defaulted on its loans last year.