IMF commends Sri Lanka’s economic recovery, stresses need for fiscal discipline

The International Monetary Fund (IMF) has praised Sri Lanka’s economic recovery, stating that the country has made remarkable progress since the financial crisis.

Speaking at a press briefing following the IMF Executive Board’s completion of the third review of Sri Lanka’s Extended Fund Facility (EFF) program, IMF Senior Mission Chief for Sri Lanka, Peter Breuer, highlighted key economic improvements.

Sri Lanka’s foreign reserves have increased significantly under the EFF program, with nearly half of the program’s objectives already achieved. Breuer noted the dramatic turnaround from June 2022, when fuel shortages, food scarcity, and subdued economic activity plagued the nation. Since the program’s implementation in 2023, Sri Lanka has recovered 40% of the income lost over the past five years. The latest economic growth figure of 5.5% further underscores this progress.

“As economic opportunities return, income levels will rise, poverty will reduce, and Sri Lanka will become a more attractive place for people to remain, rather than emigrate,” Breuer stated. He also noted that those who have already emigrated might find new opportunities back in Sri Lanka.

Despite these gains, the IMF emphasized the need for Sri Lanka to maintain fiscal discipline to continue benefiting from the $2.9 billion bailout program. The IMF approved the disbursement of the fourth tranche of $334 million but urged the government to avoid tax exemptions and align its national budget with IMF parameters.

Key priorities for Sri Lanka include improving tax compliance, better targeting of social welfare programs, and ensuring effective capital spending. The IMF also stressed the importance of restoring cost-recovery electricity pricing, particularly after Sri Lanka reduced power tariffs by 20% in January. “At the next tariff setting, it is important to ensure that tariffs once again recover costs,” Breuer stated.

Another critical issue for the next IMF review is the finalization of bilateral agreements with key creditors, including Japan, India, and China. Sri Lanka secured a preliminary agreement for a $10 billion debt restructuring last June, and completing these negotiations remains crucial.

The IMF’s latest projections indicate Sri Lanka’s economy grew by 4.5% in 2024, with a forecasted growth of 3% for 2025. The ongoing IMF-backed reforms, combined with the new budget introduced by President Anura Kumara Dissanayake, aim to achieve a primary surplus target of 2.3% of GDP by 2025.

While the IMF acknowledges Sri Lanka’s progress, it remains firm on the need for continued economic reforms to sustain growth and long-term stability.