IMF Approves $695M Boost for Sri Lanka as Reform Momentum Holds

COLOMBO (News 1st); Sri Lanka has secured an immediate financial boost of approximately US$695 million after the Executive Board of the International Monetary Fund (IMF) completed the combined Fifth and Sixth Reviews of the country’s Extended Fund Facility (EFF).

The IMF Executive Board’s decision unlocks SDR508 million, bringing total disbursements under the 48-month bailout programme to about US$2.4 billion since its approval in March 2023.

The EFF arrangement, initially valued at around US$3 billion, is aimed at restoring macroeconomic stability, strengthening public finances, rebuilding external buffers, and advancing structural reforms to support long-term growth. 

The latest review highlights Sri Lanka’s generally strong performance under the programme. Authorities successfully implemented key prior actions, including restoring cost-recovery pricing mechanisms for fuel and electricity—long considered critical to addressing fiscal imbalances in the state-owned energy sector. Quantitative targets set for end-December 2025 were fully met, while most structural reform benchmarks were achieved, albeit with some delays. 

However, the IMF noted that certain continuous performance criteria were not observed, specifically commitments related to avoiding new external payment arrears and refraining from imposing or intensifying import restrictions. 

Despite these lapses, the overall reform trajectory has remained intact, with authorities continuing to demonstrate commitment to stabilization efforts. 

The IMF cautioned that Sri Lanka’s economic outlook faces growing downside risks, driven by external and climate-related shocks. The ongoing war in the Middle East has significantly clouded prospects, primarily through rising global oil prices and potential disruptions to tourism, a key foreign exchange earner. Compounding these pressures is the aftermath of Cyclone Ditwah, which has necessitated increased government spending for recovery and reconstruction. 

Reflecting these challenges, economic growth for 2026 is projected to slow to around 3 percent. Higher energy costs are expected to push inflation upward, while weakening tourism receipts could strain the current account. The IMF warned that uncertainty surrounding the duration and intensity of the Middle East conflict continues to heighten risks to the island’s fragile recovery. 

Nevertheless, the Fund acknowledged that hard-won gains from Sri Lanka’s reform programme have enhanced economic resilience and created policy space for timely interventions. 

The government has already introduced a temporary relief package to cushion the most vulnerable populations, alongside additional allocations to address cyclone-related damages. Fiscal policy is expected to remain accommodative in the near term to support recovery efforts. However, authorities have reaffirmed their commitment to fiscal discipline beyond 2026, targeting a primary surplus of 2.3 percent of GDP from 2027 while adhering to expenditure ceilings.

The IMF stressed that sustained revenue mobilization will be essential to maintaining fiscal health, urging the government to develop a medium-term revenue strategy to improve tax efficiency and support growth. It also underlined the need for completing pending reforms in public financial management, investment frameworks, and the electricity sector. 

Debt restructuring efforts, a cornerstone of Sri Lanka’s recovery strategy following its 2022 sovereign default, are reportedly nearing completion. Yet, the IMF warned that debt sustainability risks remain elevated. 

On the monetary side, the Fund reiterated the need for policies focused on price stability, alongside greater exchange rate flexibility to strengthen external resilience. 

Gradually phasing out balance-of-payments restrictions was also highlighted as critical for rebuilding investor confidence and supporting foreign reserves. 

Looking ahead, the IMF emphasized the importance of structural reforms aimed at improving the investment climate, including upgrading public infrastructure and addressing governance vulnerabilities. 

These measures are seen as vital for unlocking Sri Lanka’s growth potential and ensuring that economic recovery translates into sustainable and inclusive development.