Sri Lanka expects final approval from the International Monetary Fund for a $2.9 billion loan in the third or fourth week of this month, the president said on Tuesday, adding that with fresh support from China, all funding requirements had been met.
The nation of 22 million people is struggling with its worst economic crisis since independence from Britain in 1948.
President Ranil Wickremesinghe told parliament there were signs the economy was improving but that the country still did not have enough foreign currency for all its imports, making the IMF deal crucial so other creditors could also start releasing funds.
"Sri Lanka has completed all prior actions that were required by the IMF," Wickremesinghe said.
"Last night we received a new letter from the ChinaExim Bank. The central bank governor and I signed a letter of intent and sent it to the IMF. As a result of this step and financing assurances from India and the Paris Club, we expect approval for the programme either in the third or fourth week of March."
It was not clear what new support China, the world's biggest sovereign creditor, extended to Sri Lanka on Monday. In January, the Export-Import Bank of China offered Sri Lanka a two-year moratorium on its debt and said it would support the country's efforts to secure the IMF loan, which a Sri Lankan source said at the time was not enough to meet IMF conditions.
China and India are Sri Lanka's biggest lenders. By end-2020, Sri Lanka owed the China EximBank $2.83 billion or 3.5% of the island's external debt, according to IMF data.
In total, Sri Lanka owed Chinese lenders $7.4 billion, or nearly a fifth of public external debt, by end-2022, calculations by the China Africa Research Initiative showed.
Sri Lanka's rupee currency hit a mid-rate of 325 on Tuesday, appreciating 12%, analysts said, against the central bank-set spot rate of 337.67. The appreciation was driven by better dollar inflows from tourism and remittances, positive sentiment over imminent approval of an IMF deal and a downturn in imports, analysts said.
"There is a lot of positivity around a possible IMF announcement and more dollar loans are expected with an approval of the bailout," said Udeeshan Jonas, chief strategist at equity research firm CAL Research.
"Also, speculators who were hoarding dollars have started to panic and convert with the rupee starting to appreciate."
Sri Lanka needs to repay about $6 billion on average each year until 2029 and will have to keep engaging with the IMF, Wickremesinghe added.
Countries in debt distress such as Zambia and Sri Lanka have faced unprecedented delays in securing IMF bailouts as China and Western economies have clashed over how to provide debt relief. Sri Lanka has been waiting for about 187 days to finalise a bailout after reaching a staff-level deal with the IMF.
This compares to a median of 55 days it took low- and middle-income countries over the past decade to go from preliminary deal to board sign-off, according to public data from over 80 cases compiled by Reuters.
Chinese Foreign Minister Qin Gang said on Tuesday that the country would continue to participate in the settlement of international debt problems in a constructive manner.
Responding to a question on the sidelines of an annual parliament meeting in Beijing, Qin also said that China should be the last to be accused of causing debt traps in other countries and called on other parties to share the burden.