Who watches Sri Lanka after IMF?

Sri Lanka’s next test is not whether it can stabilise its economy under external supervision. It is whether its own institutions are capable of defending stability once external supervision recedes.

In March 2027, Sri Lanka’s Extended Fund Facility arrangement with the International Monetary Fund is scheduled to end. By then, the country will have spent four years under one of the most far-reaching fiscal and monetary adjustment programs in its post-independence history.

Taxes were raised sharply. Cost-reflective utility pricing was restored. Direct monetary financing of the Government was sharply constrained under a new Central Bank Act. External debt was restructured. Inflation, which exceeded 70% in September 2022, has since fallen dramatically.

However, Sri Lanka’s history suggests that maintaining discipline after macroeconomic stabilisation has often proved politically difficult. Meanwhile, the widening Middle East conflict has increased uncertainty around energy prices, shipping costs and external balances. Annual external debt servicing is expected to average around $ 2.7 billion until 2027. Thereafter, repayments are projected to rise further, reaching between $ 3.2 billion and $ 3.5 billion annually in later years, with some years approaching $ 4 billion.

The country did not default in April 2022 because policymakers lacked information. The dangers of large fiscal deficits, reserve depletion, artificially suppressed utility prices and excessive foreign borrowing were repeatedly highlighted for years by the Central Bank, multilateral institutions, rating agencies and independent economists. The problem was rarely diagnostic failure. It was the inability of political systems to sustain corrective policies once immediate pressure eased.

That is the question now confronting the country again: who restrains future fiscal indiscipline once IMF conditionality disappears?

Markets provide some discipline, but imperfectly. Rating downgrades, rising borrowing costs and exchange-rate pressure often emerge only after policy credibility has already weakened. Democratic systems depend heavily on domestic institutions capable of identifying risks early and sustaining pressure for corrective action before external markets impose harsher adjustments.

Sri Lanka’s new Central Bank Act appears designed partly with this in mind.

Much discussion surrounding the law focused on inflation targeting and Central Bank independence. Less attention was paid to the sections redefining the relationship between the Central Bank, Parliament and the Government.

Section 80 permits the Governor, members of the Governing Board and Monetary Policy Board, and Deputy Governors to “seek an opportunity” on their own initiative to apprise Parliament or submit reports. The same section requires the Central Bank to lay before Parliament an annual assessment of “the state of the economy” and “the condition of the financial system”.

The language is notable.

Section 84 establishes a Coordination Council chaired by the CBSL Governor and including the Treasury Secretary. The Council is required to exchange views on macroeconomic developments, risks and fiscal matters. More significantly, the Central Bank must place before the Council its assessment of the impact of Government economic policies and fiscal operations on price and financial sector stability.

The legislation suggests Parliament intended to give the Central Bank a broader macroeconomic advisory and accountability role than under previous frameworks.

The law also empowers the Central Bank to advise the Government on any matter likely to affect the achievement of its objectives. Those objectives extend beyond price stability to financial-system stability. In practice, sustained fiscal indiscipline threatens both.

Whether the institution will exercise that authority consistently is another matter.

Institutional culture changes more slowly than legislation. For decades, Sri Lanka’s economic institutions operated within a political framework where deference to elected authority was often prioritised over public confrontation. Central banks rarely become assertively independent overnight merely because statutes change.

The durability of institutional independence will ultimately be tested not during periods of crisis, but during periods of political and economic normalisation. Maintaining discipline during an economic emergency is comparatively easy. Maintaining it after stability returns is historically where governments often falter.

The IMF program will end. Debt repayments will not. Nor will political pressure for subsidies, tax concessions and administratively suppressed prices.

The IMF can impose discipline temporarily. Only domestic institutions can sustain it politically.