The Sri Lankan authorities’ prompt action amid the Middle East war helped preserve macroeconomic and social stability while gains from their economic reform program provided space for policy response, according to the IMF Mission Chief for Sri Lanka Evan Papageorgiou.

An International Monetary Fund (IMF) team led by Evan Papageorgiou visited Colombo from June 24 to 30, to take stock of recent macroeconomic developments and discuss the authorities’ progress in implementing their economic reform program supported by the IMF’s Extended Fund Facility (EFF) arrangement. 

At the conclusion of the visit, Papageorgiou issued the following statement:

“The Middle East war has weighed on Sri Lanka’s economy. Headline inflation rose from 1.6 percent y/y in February 2026 to 5.5 percent y/y in May following energy price increases. Tourist arrivals growth softened and gross international reserves accumulation decelerated. The Central Bank of Sri Lanka responded with a 100-basis point policy rate hike and deployed macroprudential measures. The government rolled out a temporary, on-budget, relief package comprising fuel, electricity, and fertilizer subsidies, as well as cash transfers to the most vulnerable households. While uncertainty remains high, the recent decline in global commodity prices offers some relief from external pressures.

Staying the course on the reform agenda remains critical to solidify Sri Lanka’s recovery and to preserve fiscal and external sustainability. Following fiscal easing in 2026, the authorities are committed to reverting to the primary balance target of 2.3 percent of GDP in 2027 to safeguard macroeconomic stability. Efforts to improve tax compliance, broaden the tax base, and enhance public financial management, including by preventing the reemergence of expenditure arrears, should continue. Resolving bottlenecks to spending execution—including disaster-related support—is imperative for effective post-cyclone recovery and reconstruction. Accelerating the reform of state-owned enterprises and maintaining cost-recovery energy pricing are key to minimizing fiscal risks. At the same time, the authorities should prioritize adequate targeting and coverage of social safety nets to protect vulnerable families.

While debt restructuring is nearing completion, progress toward building capacity of the Public Debt Management Office needs to accelerate to promote prudent debt management practices, deepen domestic debt markets, and support Sri Lanka’s eventual return to international capital markets.

Monetary policy should remain prudent, agile, and data-dependent to safeguard price stability under heightened global uncertainty. Exchange rate flexibility is paramount to support external adjustment in the face of shocks without undermining reserve accumulation, with foreign exchange intervention limited to addressing excessive volatility. Balance of payments restrictions should be phased out. Strengthening operational risk, cybersecurity, and AML/CFT safeguards are essential for preserving financial stability.

Building resilience to shocks and achieving strong, durable, and inclusive growth requires steadfast implementation of governance reforms. It also requires bold reforms to improve the efficiency and fairness of the tax system, liberalize trade, address labor market rigidities, and enhance the business environment to attract investment, create jobs, and bring poverty rates down.

Sri Lanka’s program performance will be formally assessed in the context of the Seventh Review of the EFF. The dates of the mission will be announced in due time.

The mission held meetings with His Excellency the President and Finance Minister Anura Kumara Dissanayake, the Honorable Prime Minister Dr. Harini Amarasuriya, Honorable Labor Minister and Deputy Minister of Finance and Planning Prof. Anil Jayantha Fernando, Central Bank of Sri Lanka Governor Dr. P. Nandalal Weerasinghe, Secretary to the Treasury Dr. Harshana Suriyapperuma, Senior Economic Advisor to the President Mr. Duminda Hulangamuwa, Chief Advisor to the President on Digital Economy Dr. Hans Wijayasuriya, and other senior government and CBSL officials. The mission also met with representatives from the private sector, civil society organizations, and development partners.

We would like to thank the authorities for the excellent engagement during the visit.”