IMF and Sri Lanka reach staff-level agreement on fourth review

The International Monetary Fund (IMF) and the Sri Lankan government have reached a staff-level agreement on the Fourth Review of Sri Lanka’s economic reform program.

This program is supported by the IMF’s 48-month Extended Fund Facility (EFF), which was approved in March 2023 for a total of SDR 2.3 billion (around US$3 billion).

The agreement was finalized following constructive discussions in Colombo and during the Spring Meetings of the IMF and World Bank in Washington DC. However, before the next tranche of funds is disbursed, the agreement must be approved by the IMF Executive Board.

Approval will depend on two key conditions:

1. Implementation of prior actions to restore cost-recovery electricity pricing and ensure the proper function of the automatic electricity price adjustment system.
2. Completion of the financing assurances review, which will assess the support pledged by multilateral partners and progress in debt restructuring.

If approved, Sri Lanka will receive SDR 254 million (around US$344 million), bringing total disbursements under the program to SDR 1.27 billion (approximately US$1.72 billion).

The IMF praised Sri Lanka’s progress, highlighting a strong 5% economic rebound in 2024 and significant reforms that improved the revenue-to-GDP ratio from 8.2% in 2022 to 13.5% in 2024. By the end of March 2025, gross official reserves rose to US$6.5 billion, driven by strong foreign exchange purchases by the central bank.

Most performance targets set for the end of March were met, and several key structural reforms have been implemented, though the benchmark on cost-recovery electricity pricing remains unmet. Inflation remains under control and within the central bank’s target range.

Despite recent progress, the IMF warned that Sri Lanka still faces risks due to global uncertainty and the lingering effects of its own economic crisis. It emphasized the importance of continuing revenue reforms, careful budget management, and restoring electricity pricing policies to reduce fiscal risks and attract investment in energy infrastructure.

The IMF also highlighted the need to design a transparent and efficient tax exemption system, strengthen tax compliance, and continue building foreign reserves. While the banking sector remains stable and well-capitalized, the IMF noted the importance of ongoing monitoring to protect financial and price stability.

The organization urged the government to protect the most vulnerable populations through better-targeted and time-bound social support measures. It also stressed that all fiscal aid must stay within budget limits.

The IMF acknowledged the commitment shown by the new Sri Lankan government to continue with reforms, which has helped boost confidence. Moving forward, it said that reducing corruption risks and maintaining reform momentum is crucial for long-term economic stability and inclusive growth.

The IMF team met with several key Sri Lankan officials during the discussions, including Deputy Finance Minister Dr. Harshana Suriyapperuma, Central Bank Governor Dr. P. Nandalal Weerasinghe, and Treasury Secretary K. M. Mahinda Siriwardana.

The IMF thanked Sri Lankan authorities for their strong cooperation and productive discussions.

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