IMF urges Sri Lanka to stay on reform path amid economic pressures

The IMF says Sri Lanka must stay on its reform path as new external pressures affect the economy.

An International Monetary Fund (IMF) team led by Evan Papageorgiou visited Colombo from June 24 to 30, 2026, to review recent macroeconomic developments and discuss Sri Lanka’s progress under the IMF-supported Extended Fund Facility (EFF) arrangement.

Issuing a statement at the end of the visit, Papageorgiou said the Middle East war has weighed on Sri Lanka’s economy.

According to the IMF, headline inflation increased from 1.6% year-on-year in February 2026 to 5.5% year-on-year in May, following energy price increases.

The IMF also said tourist arrivals growth had softened, while the accumulation of gross international reserves had slowed down.

In response, the Central Bank of Sri Lanka raised the policy rate by 100 basis points and introduced macroprudential measures.

The IMF noted that the government had also introduced a temporary relief package through the budget. The package includes fuel, electricity and fertilizer subsidies, as well as cash transfers for the most vulnerable households.

However, the IMF said uncertainty remains high, although the recent decline in global commodity prices has provided some relief from external pressures.

The IMF stressed that Sri Lanka must continue its reform program to strengthen the country’s recovery and protect fiscal and external stability.

It said that after fiscal easing in 2026, Sri Lankan authorities have committed to returning to the primary balance target of 2.3% of Gross Domestic Product (GDP) in 2027.

The IMF said efforts should continue to improve tax compliance, broaden the tax base and strengthen public financial management. It also said steps must be taken to prevent the reemergence of expenditure arrears.

The Fund further stated that bottlenecks in spending execution, including disaster-related support, must be resolved to support post-cyclone recovery and reconstruction.

It also said the reform of state-owned enterprises should be accelerated, while cost-recovery energy pricing should be maintained to reduce fiscal risks.

At the same time, the IMF said Sri Lanka should ensure that social safety nets are properly targeted and provide adequate coverage to protect vulnerable families.

The IMF also noted that Sri Lanka’s debt restructuring process is nearing completion. However, it said progress must be accelerated to build the capacity of the Public Debt Management Office.

According to the IMF, this is important to promote prudent debt management, deepen domestic debt markets and support Sri Lanka’s eventual return to international capital markets.

The IMF said monetary policy should remain prudent, flexible and based on data to protect price stability during a period of high global uncertainty.

It also said exchange rate flexibility is important to help Sri Lanka adjust to external shocks without weakening reserve accumulation. Foreign exchange intervention should be limited to addressing excessive volatility, the IMF added.

The Fund further stated that balance of payments restrictions should be phased out. It also called for stronger operational risk, cybersecurity and anti-money laundering and counter-terrorism financing safeguards to protect financial stability.

The IMF said Sri Lanka needs to continue governance reforms to build resilience against shocks and achieve strong, durable and inclusive growth.

It also called for reforms to improve the efficiency and fairness of the tax system, liberalize trade, address labor market rigidities and improve the business environment.

The IMF said these reforms are needed to attract investment, create jobs and reduce poverty.

Sri Lanka’s program performance will be formally assessed during the Seventh Review of the EFF arrangement. The IMF said the dates of that mission will be announced later.

During the visit, the IMF mission held meetings with President and Finance Minister Anura Kumara Dissanayake, Prime Minister Dr. Harini Amarasuriya, Labor 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 IMF team also met Senior Economic Advisor to the President Duminda Hulangamuwa, Chief Advisor to the President on Digital Economy Dr. Hans Wijayasuriya, other senior government and Central Bank officials, representatives of the private sector, civil society organizations and development partners.

The IMF thanked Sri Lankan authorities for their engagement during the visit.