The International Monetary Fund (IMF) yesterday said Sri Lanka’s swift response to the economic fallout from the Middle East conflict had preserved macroeconomic and social stability, while urging the Government to pursue ‘bold reforms’ as it prepares for the Seventh Review of its Extended Fund Facility (EFF) arrangement.
The Fund said stronger, more durable and inclusive growth would require ‘bold reforms’ to improve the efficiency and fairness of the tax system, liberalise trade, address labour market rigidities and enhance the business environment to attract investment, create jobs and reduce poverty.
In a statement issued at the conclusion of a week-long staff visit to Colombo, the IMF said gains under Sri Lanka’s reform program had created the policy space to respond to the external shock, while reiterating the need to restore fiscal discipline, strengthen debt management and maintain prudent monetary and exchange rate policies.
An IMF team led by Evan Papageorgiou visited Colombo from 24 to 30 June to review recent macroeconomic developments and progress under the EFF-supported reform program.
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% YoY in February 2026 to 5.5% YoY 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 fertiliser 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% 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 re-emergence 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 minimising fiscal risks. At the same time, the authorities should prioritise 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, liberalise trade, address labour 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 President and Finance Minister Anura Kumara Dissanayake, Prime Minister Dr. Harini Amarasuriya, Labour Minister and Deputy Finance and Planning Minister Prof. Anil Jayantha Fernando, Central Bank of Sri Lanka Governor Dr. P. Nandalal Weerasinghe, Treasury Secretary Dr. Harshana Suriyapperuma, Senior Economic Adviser to the President Duminda Hulangamuwa, Chief Adviser 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 organisations and development partners. We would like to thank the authorities for the excellent engagement during the visit,’ Papageorgiou said.