Monday Jun 08, 2026
Monday Jun 08, 2026
Monday, 8 June 2026 05:41 - - {{hitsCtrl.values.hits}}
The International Monetary Fund (IMF) has revised down Sri Lanka’s economic outlook and approved temporary adjustments to its reform program in response to the economic fallout from the Middle East conflict and Cyclone Ditwah, while maintaining the program’s long-term fiscal and debt sustainability objectives.
The IMF Executive Board last week completed the combined Fifth and Sixth Reviews under Sri Lanka’s Extended Fund Facility (EFF), enabling an immediate disbursement of SDR 508 million, equivalent to approximately $ 695 million, and bringing total IMF financing under the program to about $ 2.4 billion.
The Fund said gains achieved under Sri Lanka’s reform program had enabled the authorities to respond to successive shocks while preserving economic resilience.
However, it noted that the Middle East conflict has significantly worsened the country’s external outlook through higher fuel import costs, weaker tourism receipts, pressure on the balance of payments, and softer external demand.
According to the IMF’s revised baseline projections, Sri Lanka’s economic growth is now expected to slow to 3% in 2026 from the 4% forecast prior to the conflict.
End-year inflation has been revised up to 6.1% from 5%, while projected gross official reserves at end-2026 have been reduced to $ 8.645 billion from the $ 9.506 billion anticipated before the conflict. Tourism earnings are now projected at $ 2.5 billion compared with the previous estimate of $ 3.1 billion, while the current account excluding primary income is forecast at 1.8% of GDP, down from 2.8% previously.
The IMF said the conflict has particular significance for Sri Lanka given the country’s dependence on the Middle East region. The report noted that around half of Sri Lanka’s petroleum imports originate from the region, while the Middle East accounts for about 40% of remittance inflows and serves as a major aviation hub for travel to Sri Lanka.
Reflecting the economic impact of the shocks, the IMF endorsed the Government’s decision to activate the escape clause under the Public Financial Management Act and temporarily ease fiscal policy in 2026. The Fund noted that Sri Lanka recorded a primary surplus of 5.4% of GDP in 2025, significantly exceeding program expectations, and said a lower primary balance target had been adopted for 2026. The program is expected to return to its medium-term fiscal anchor of a 2.3% primary surplus from 2027 onwards.
The Government has also introduced a temporary support package valued at Rs. 91.8 billion comprising fuel subsidies, electricity subsidies, fertiliser assistance, fisheries support, and an Aswesuma cash transfer. The package is capped at Rs. 100 billion, financed through Budget reallocations and scheduled to expire by September 2026. The IMF described the temporary fiscal easing as an appropriate response to cushion vulnerable households and support recovery while preserving debt sustainability.
The review also reflects a slower pace of reserve accumulation than previously envisaged. The IMF said the end-March indicative target on net international reserves was narrowly missed due to a slowdown in foreign exchange purchases following the Middle East conflict, changes in the composition of reserves, and valuation effects.
Despite the weaker outlook, program performance was assessed as broadly strong. The IMF said all end-December 2025 quantitative performance criteria and indicative targets were met except for the criterion relating to new external payment arrears. Fiscal revenue and primary balance targets were exceeded by substantial margins.
The sole waiver approved by the IMF relates to a cybercrime incident that resulted in a missed external debt payment of approximately $ 2.5 million to the Australian Government. The Fund said authorities requested a waiver of non-observance on the basis that the breach was minor and corrective measures had been implemented, including strengthened payment procedures and the rollout of a new debt management information system. IMF staff supported the waiver request.
The IMF also noted that new and modified quantitative targets and structural benchmarks have been introduced through February 2027, reflecting the changed economic environment and the need to accommodate the impact of the external shocks.
While allowing temporary flexibility, the Fund stressed that the program’s core policy framework remains intact. Fiscal consolidation is expected to resume from 2027, reserve accumulation will continue, exchange rate flexibility will be maintained, and energy pricing is expected to remain aligned with cost-recovery principles. The IMF said the final year of the program would focus on consolidating gains achieved since the crisis and strengthening the foundations for sustainable growth.
For investors and policymakers, the review signals that the IMF is willing to accommodate temporary external shocks through revised projections and limited fiscal flexibility, but remains committed to preserving the broader macroeconomic adjustment and debt sustainability framework underpinning Sri Lanka’s recovery.
