Sri Lanka’s economy has continued to show resilience amid successive shocks, but risks remain titled to the downside, the International Monetary Fund (IMF) said after completion of its seventh review of the External Fund Facility (EFF) and Article IV Consultation.
IMF staff and the Sri Lankan authorities held discussions relating to the Seventh Review of the IMF’s Extended Fund Facility (EFF), and the 2026 Article IV Consultation in the past two weeks.
“Discussions will continue in the near term toward reaching agreement on parameters and policies needed to conclude the Seventh Review,” the IMF said in a statement.
Mission Chief Evan Papageorgio said economy has grown for 11 consecutive quarter, inflationary expectations are broadly anchored despite over 8 percent in August, gross reserves have increased, banks remain capitalized, fiscal outturn for the first half of this year is strong, and debt structuring was “largely completed”.
“However, Sri Lanka continues to face downside risks from uncertainty over the duration and intensity of the Middle East war, global trade policy, and the impact of El Niño,” he said in a statement.
“Safeguarding macroeconomic stability in a shock-prone environment requires unwavering commitment to prudent policies and reforms to rebuild fiscal and external buffers, maintain price stability, and advance the governance agenda while strengthening social safety nets to protect the most vulnerable.”
“In this regard, it would be critical to develop and implement a medium-term revenue strategy to sustain revenue mobilization while improving the efficiency and fairness of the tax system. Steadfast efforts are needed to broaden the tax base and rationalize tax exemptions and incentives. Strengthening revenue administration would further improve tax compliance and support durable revenue gains.”
“Upholding cost-recovery energy pricing will help minimize fiscal risks arising from state-owned enterprises. It is also important to address bottlenecks to capital spending execution, including to accelerate cyclone Ditwah-related recovery and reconstruction.”
“Monetary policy should stand ready to address inflationary pressures and ensure price stability within the medium-term period in line with the flexible inflation targeting framework”.
” Greater exchange rate flexibility is key to absorbing shocks and supporting reserve accumulation. At the first statutory review, it would be prudent to maintain the 5 percent inflation target and the current accountability band. The current target preserves the flexibility Sri Lanka needs amid high food and energy price volatility, and once a track record of low and stable inflation is established, convergence toward a lower target could be considered at the next review,” he saiid.
Papageorgio said preserving the integrity of the anti-corruption legislative framework is critical to enhance public trust and said select clauses from the recently tabled amendments could weaken transparency and accountability.
“Shifting from stabilization to transformation requires sustained momentum on structural reforms to foster an enabling business environment and attract investment, including by liberalizing trade, modernizing business and labor regulations, broadening access to finance, and advancing digitalization. Ultimately, establishing a track record of sound policy and reform implementation will help strengthen resilience, durably restore confidence, and lift living standards through strong and inclusive growth as our research suggests.”
“The IMF team visited Jaffna and learned first-hand about the Northern Province’s economic potential. Discussions with the private sector and civil society highlighted opportunities to unlock growth and create jobs through investments in connectivity, skills, and sectors such as agriculture, fisheries, tourism, and renewable energy, while strengthening social protection so that the benefits of Sri Lanka’s economic transformation are shared more broadly.”