IMF says Sri Lanka economy remains resilient as seventh review talks continue

The International Monetary Fund (IMF) says Sri Lanka’s economy remains resilient, with 4.2% growth in the second quarter of 2026 and official reserves rising to US$6.9 billion.

Discussions are continuing towards a staff-level agreement for the Seventh Review of the country’s IMF programme.

An IMF team led by Evan Papageorgiou visited Sri Lanka from September 10 to 23, 2026, to review recent economic developments and progress in implementing economic and financial policies under the Extended Fund Facility (EFF) arrangement.

The team also discussed policy recommendations under the IMF’s 2026 Article IV Consultation.

At the end of the mission, Papageorgiou said Sri Lanka’s economy had shown strong resilience despite facing several shocks.

The IMF said economic activity had now recorded 11 consecutive quarters of strong growth.

However, headline inflation increased to 8% year-on-year in August due to the global oil price shock, although the IMF said inflation expectations remain broadly anchored.

The Fund also said Sri Lanka’s gross official reserves had continued to increase, while the country’s banks remain well capitalized and profitable.

Fiscal performance during the first half of 2026 was described as strong, while Sri Lanka’s debt restructuring process is now largely completed.

However, the IMF warned that the country continues to face downside risks due to uncertainty over the duration and intensity of the Middle East war, global trade policy developments and the impact of El Niño.

It said maintaining economic stability in an environment vulnerable to shocks would require continued prudent policies and reforms to rebuild fiscal and external buffers, maintain price stability and advance governance reforms.

The IMF also stressed the need to strengthen social safety nets to protect vulnerable groups.

The Fund said Sri Lanka should develop and implement a medium-term revenue strategy to maintain revenue collection while improving the efficiency and fairness of the tax system.

It called for continued efforts to broaden the tax base, reduce and rationalize tax exemptions and incentives, and strengthen revenue administration to improve tax compliance and secure lasting revenue gains.

The IMF also said maintaining cost-recovery pricing for energy would help reduce fiscal risks from state-owned enterprises.

It further called for action to address delays in carrying out capital expenditure, including speeding up recovery and reconstruction related to Cyclone Ditwah.

On monetary policy, the IMF said authorities should be ready to respond to inflationary pressures and maintain price stability under Sri Lanka’s flexible inflation targeting framework.

It said greater exchange rate flexibility would help the economy absorb shocks and support the accumulation of foreign reserves.

The IMF recommended maintaining the current 5% inflation target and the existing accountability band at the first statutory review.

According to the Fund, the current target provides Sri Lanka with necessary flexibility at a time of high food and energy price volatility.

Once Sri Lanka establishes a record of low and stable inflation, moving towards a lower inflation target could be considered at the next review, the IMF said.

The IMF also highlighted the importance of protecting the integrity of Sri Lanka’s anti-corruption legal framework to strengthen public trust.

It warned that some clauses in recently tabled amendments could weaken transparency and accountability.

The Fund said Sri Lanka must now move from economic stabilization towards economic transformation by maintaining progress on structural reforms.

It called for reforms to improve the business environment and attract investment, including through trade liberalization, modernizing business and labour regulations, widening access to finance and advancing digitalization.

The IMF said a sustained record of sound economic policies and reform implementation would help strengthen Sri Lanka’s resilience, restore confidence and improve living standards through strong and inclusive economic growth.

During the mission, the IMF team also visited Jaffna and studied the economic potential of the Northern Province.

Discussions with private sector representatives and civil society groups highlighted opportunities to create jobs and support growth by investing in connectivity and skills and developing sectors including agriculture, fisheries, tourism and renewable energy.

The IMF also stressed the importance of stronger social protection to ensure that the benefits of Sri Lanka’s economic transformation are shared more widely.

During the visit, the IMF delegation held discussions with President and Finance Minister Anura Kumara Dissanayake, Prime Minister Dr. Harini Amarasuriya, Labour Minister and Deputy Minister of Finance and Planning Prof. Anil Jayantha Fernando, Central Bank Governor Dr. P. Nandalal Weerasinghe and Treasury Secretary Dr. Harshana Suriyapperuma.

The team also met Senior Economic Advisor to the President Duminda Hulangamuwa, Chief Advisor to the President on Digital Economy Dr. Hans Wijayasuriya, Northern Province Governor Nagalingam Vethanayahan and other senior government and Central Bank officials.

Meetings were also held with parliamentarians, representatives of the private sector, civil society organizations and development partners.

The IMF thanked Sri Lankan authorities for their cooperation during the mission and said discussions are continuing with the aim of reaching a staff-level agreement in the near term.

Such an agreement would pave the way for the timely completion of the Seventh Review under Sri Lanka’s EFF programme.

The IMF also reaffirmed its commitment to continue supporting Sri Lanka.