IMF unlocks $ 700 m, says fiscal response to shocks appropriate

Deputy Managing Director and Acting Chair Kenji Okamura 

• Economic growth revised down to 3% for 2026
• Says program performance remains generally strong
• Efforts required to complete public financial and investment management, electricity sector reforms
• Notes sustaining revenue mobilisation crucial 
• Monetary policy should continue prioritising price stability 
• Greater exchange rate flexibility and gradually phasing out BOP measures critical to rebuild buffers

In an expected yet major confidence boost, the Executive Board of the International Monetary Fund (IMF) yesterday approved the combined Fifth and Sixth Reviews under Sri Lanka’s four-year Extended Fund Facility (EFF) program, unlocking around $ 700 million in financing and marking another key milestone in the country’s post-crisis recovery program.

In a statement yesterday, the IMF said:

“The Executive Board of the IMF completed the combined Fifth and Sixth Reviews of Sri Lanka’s economic reform program supported by the 48-month EFF arrangement. Completion of the combined reviews provides SDR 508 million (about $ 695 million), bringing the total purchases under the arrangement to SDR 1.778 billion (about $ 2.4 billion).

“The EFF arrangement for Sri Lanka was approved by the Executive Board on 20 March 2023 in an amount of SDR 2.286 billion (395% of quota or about $ 3 billion). The arrangement supports Sri Lanka’s reform program to durably restore macroeconomic stability by (i) restoring fiscal and debt sustainability while protecting the vulnerable, (ii) safeguarding price and financial sector stability, (iii) rebuilding external buffers, (iv) strengthening governance and reducing corruption vulnerabilities, and (v) advancing growth-oriented structural reforms.”

Following the Executive Board’s discussion, Deputy Managing Director and Acting Chair Kenji Okamura said: “Sri Lanka’s strong implementation under the EFF arrangement has continued despite challenging circumstances. Gains from the economic reform program helped preserve economic resilience and provided room to respond to Cyclone Ditwah and the Middle East war. 

“The latter, however, has significantly worsened Sri Lanka’s economic outlook and tilted risks to the downside. For 2026, growth is projected to slow down to 3%. Higher oil prices would increase inflation and weaken the current account, which would also be adversely impacted by lower tourism receipts. The uncertainty regarding the war’s intensity and duration heightens risks to the outlook.

IMF...

“Fiscal easing in 2026 is appropriate in response to the shocks, and the Government is implementing a temporary relief package, while also allocating additional spending to support recovery and reconstruction following Cyclone Ditwah. From 2027 onward, the authorities are appropriately committed to reverting to the primary balance target of 2.3% of GDP, as well as complying with the primary expenditure ceiling.

“Program performance remains generally strong, but efforts are required to complete public financial and investment management and electricity sector reforms. Sustained revenue mobilisation is crucial to make the tax system more efficient and growth-enhancing and should be spearheaded by developing a medium-term revenue strategy. Debt restructuring is nearing completion, but debt sustainability risks remain high.

“Monetary policy should continue prioritising price stability. Greater exchange rate flexibility and gradually phasing out balance of payments (BOP) measures remain critical to rebuild external buffers and resilience.

“Well-calibrated structural reforms and renewed public infrastructure are also needed to improve the investment climate and lift the growth potential.”