IMF tells Sri Lanka to keep reform engine running as global turbulence looms

• IMF Mission Chief Evan Papageorgiou says Fourth Review shows strong performance, with all quantitative targets met except underreported expenditure arrears 
• Explains underreporting linked to interest subsidies for senior citizens and reporting gaps in line Ministries
• Emphasises maintaining cost-reflective electricity tariffs to protect fiscal stability and reduce taxpayer burden
• Notes PUCSL tariff formula to be reviewed with World Bank and ADB support by November
• Cautions against opaque tax exemptions, pushing for transparent rule-based framework
• Structural benchmarks set to amend SDP Act by August and Port City Act by October
• IMF Resident Representative Martha Woldemichael highlights progress on Central Bank independence, anti-corruption laws and governance action plans

IMF Mission Chief for Sri Lanka  Evan Papageorgiou

By Charumini de Silva

International Monetary Fund (IMF) Mission Chief for Sri Lanka Evan Papageorgiou yesterday insisted Sri Lanka sustain the remarkable momentum of reform progress amidst looming external shocks, particularly global trade policy volatility, which could threaten recovery.

Speaking to journalists, he described Sri Lanka’s program performance under its Fourth Review as “generally strong,” acknowledging that all quantitative targets for the review had been met, except for an issue around underreported Government expenditure arrears, where a waiver was granted after authorities took corrective measures. 

On 1 July, Sri Lanka secured another vote of confidence from the IMF, after its Executive Board approved a $ 350 million disbursement under the country’s Extended Fund Facility (EFF) program, allowing the authorities to draw $ 350 million, bringing the total to $ 1.74 billion.

He said that the country delivered on two prior actions ahead of the Fourth Review including; restoring cost-reflective electricity tariffs for the rest of 2025 and operationalising the automatic electricity tariff adjustment mechanism. 

“Overall, there has been good progress and it is vital to sustain this reform momentum and continue building on these hard-won gains,” he said, adding that Sri Lanka’s outlook remains positive.”

Given the global headwinds in trade policy, he said: “In case shocks materialise, the authorities should work closely with the IMF to assess the impact and formulate policy responses within the contours of the program.”

Addressing the earlier issue of underreported Government expenditure arrears, he noted that it was uncovered during a routine staff review with the authorities, while examining the Budget aspirations. “We identified inadvertent underreporting of data on arrears. One of the main sources of these arrears was linked to interest subsidies for senior citizens that ended in 2022. Although some of these liabilities were published separately by the Finance Ministry, they were not reported to the IMF under the program,” he said.

Papageorgiou also noted that there were weaknesses in how line Ministries reported outstanding liabilities in a timely manner to the Finance Ministry. “These discrepancies led to confusion over the definition of arrears in the technical Memorandum of Understanding (MoU) of the program. As a result, the underreporting of the stock of arrears caused Sri Lanka to miss the quantitative performance criterion on arrears in the last three reviews, thereby breaching the authorities’ commitment to provide accurate data,” he said.

However, Papageorgiou said following corrective actions, including a proper plan to clear the arrears, the IMF Executive Board, following the Managing Director’s recommendation, accepted the Government’s measures and granted a waiver, which allowed the Fourth Review to move forward and be completed.

With regards to the electricity tariffs, the IMF Mission Chief for Sri Lanka acknowledged it as a critical element of discussions, given the direct impact on the cost-of-living. 

“Maintaining a cost-reflective electricity tariff approach is essential to contain fiscal risks and ensure long-term economic stability to ensure that the utility sector operates on commercial principles without burdening taxpayers. It also supports stable and predictable electricity pricing,” he stressed.

Papageorgiou outlined the critical role of maintaining the cost-reflective tariff formula overseen by the Public Utilities Commission of Sri Lanka (PUCSL) to protect public finances and ensure stability in the sector.

He noted that the existing tariff structure, which cross-subsidise smaller electricity users, would be further reviewed with development partners such as the World Bank and the Asian Development Bank (ADB). 

“Technical assistance is being provided to evaluate the pricing formula with recommendations expected by November,” he added.

Papageorgiou asserted that it is crucial to maintain a revenue-based fiscal consolidation path. He said the country has progressed from 8.2% of GDP in 2022 to an estimated 13.9% in 2025, targeting a primary surplus of 2.3% of GDP.

Responding to a question on tax exemptions, the IMF Mission Chief for Sri Lanka warned against previous practices of granting non-transparent tax exemptions, which had led to significant losses in Government revenue and opened the door to corruption vulnerabilities. Under the IMF program, Sri Lanka has committed to halting new tax exemptions till a modernised framework is finalised.

“Structural benchmarks have been set to amend the Strategic Development Projects (SDP) Act by the end of August and the Port City Act by the end of October, with related regulations also to be clarified,” he noted.

Going forward, he said exemptions are expected to follow transparent, rule-based eligibility criteria with defined time limits. “Tax exemptions should not be the primary investment promotion tool and Sri Lanka needs a stable, predictable framework to support investor confidence,” he pointed out.

Papageorgiou credited the overall reform efforts and stronger revenue mobilisation efforts, whilst noting that growth has bounced back firmly since 2024 supported by recovering confidence among businesses and consumers.

He stressed the need to continue strengthening tax compliance, public financial management, and governance at State-owned banks to create greater fiscal space and encourage private sector growth. In addition, he emphasised the importance of gradually restoring exchange rate flexibility, phasing out administrative balance-of-payment (BoP) measures, and tackling non-performing loans to build a more resilient financial sector.

On the debt front, he said Sri Lanka has secured bilateral restructuring agreements with Japan, France, and India, bringing the overall debt restructuring effort closer to completion.

Addressing a question on governance reforms, IMF Resident Representative in Sri Lanka Martha Tesfaye Woldemichael noted that Sri Lanka has made substantial progress. 

She pointed to legislation enacted to safeguard the independence of the Central Bank, strengthen public financial management, and enhance the legal framework for anti-corruption through the new Anti-Corruption Act. 

“Sri Lanka also became the first country in Asia to undergo an IMF Governance Diagnostic Assessment in 2023, with key recommendations now embedded in the EFF program,” she added. 

Woldemichael said in February 2025, the Government published a Governance Action Plan as part of a structural benchmark under the program, where many of its measures align with the IMF diagnostic recommendations, including adopting asset recovery law. 

“Looking ahead, the IMF hopes Sri Lanka will continue to prioritise implementing these reforms, including further strengthening asset declaration systems, enhancing Customs administration, and tightening the procurement process to curb revenue leakages,” she emphasised.