More time needed to gauge impact of global shocks on Sri Lanka’s economy: IMF

The International Monetary Fund (IMF) says that the Sri Lankan government remains committed to program objectives and implementation is strong and commendable, but more time is needed to assess the implications for Sri Lanka of the external shock as global uncertainty remains elevated and is contributing to financial market volatility.

After concluding the discussions with the Sri Lankan authorities on economic performance and policies underpinning the Fourth Review under the IMF Extended Fund Facility (EFF) arrangement, the newly appointed Senior Mission Chief Evan Papageorgiou said that the discussions will continue toward reaching agreement in the near term on parameters and policies that will maintain the reform momentum under the program during this period of increased global uncertainty.

Issuing a statement, after concluding the IMF delegation’s visit to Sri Lanka, Papageorgiou said that Sri Lanka’s ambitious reform agenda supported by the IMF Extended Fund Facility (EFF) continues to deliver commendable outcomes and that the post-crisis growth rebound of 5 percent in 2024 is impressive. 

Inflation declined considerably in recent quarters and has fallen to ‑2.6 percent at end-March 2025, he highlighted, adding that the gross official reserves increased to US$6.5 billion at end-March 2025 with sizeable foreign exchange purchases by the central bank. 

“Substantial fiscal reforms have strengthened public finances”, the statement added.

Furthermore, the statement noted that the recent external shock and evolving developments are creating uncertainty for the Sri Lankan economy, which is still recovering from its own economic crisis and that more time is needed to assess the impact of the global shock and how its implications for Sri Lanka can be addressed within the contours of its IMF-supported program.

“The government’s sustained commitment to program objectives is ensuring policy continuity and program implementation remains strong. Going forward, sustaining the reform momentum is critical to safeguard the hard-won gains of the program and put the economy on a path toward lasting macroeconomic stability and higher inclusive growth”, the Senior Mission Chief expressed.

The statement further pointed out that against increased global uncertainty, sustained revenue mobilization efforts and prudent budget execution in line with Budget 2025 are critical to preserve the limited fiscal space. 

Boosting tax compliance, including by reinstating an efficient and timely VAT refund mechanism, will help contribute to revenue gains without resorting to additional tax policy measures, it added, noting that avoiding new tax exemptions will help reduce fiscal revenue leakages, corruption risks and build much needed fiscal buffers, including for social spending to support Sri Lanka’s most vulnerable. 

The IMF’s Senior Mission Chief to Sri Lanka also stated that restoring cost recovery in electricity pricing will help minimize fiscal risks arising from the electricity state-owned enterprise.

“The government has an important responsibility to protect the poor and vulnerable at this uncertain time. It is important to redouble efforts to improve targeting, adequacy, and coverage of social safety nets. Fiscal support needs to be well-targeted, time-bound, and within the existing budget envelope”

“While inflation remains low, continued monitoring is warranted to ensure sustained price stability and support macroeconomic stability. Against ongoing global uncertainty, it remains important to continue rebuilding external buffers through reserves accumulation”, he added.

Papageorgiou expressed that however, the discussions are ongoing, and the authorities are encouraged to continue to make progress on restoring cost-recovery electricity pricing, strengthening the tax exemptions framework, and other important structural reforms.

“Discussions are continuing with the goal of reaching staff-level agreement in the near term to pave the way for the timely completion of the fourth review. We reaffirm our commitment to support Sri Lanka at this uncertain time”, Papageorgiou added.

The IMF team held meetings with President and Finance Minister Anura Kumara Dissanayake, Prime Minister Dr. Harini Amarasuriya, Labor Minister and Deputy Minister of Economic Development Prof. Anil Jayantha Fernando, Deputy Minister of Finance and Planning Dr. Harshana Suriyapperuma, Central Bank of Sri Lanka Governor Dr. P. Nandalal Weerasinghe, Secretary to the Treasury Mahinda Siriwardana, Senior Economic Advisor to the President Duminda Hulangamuwa, and other senior government and CBSL officials. 

The team also met with parliamentarians, representatives from the private sector, civil society organizations, and development partners.