IMF Flags Risks Despite Sri Lanka's Economic Gains: Calls for Stronger Budget, Tax Reforms

COLOMBO (News 1st): The International Monetary Fund (IMF) has commended Sri Lanka’s recent economic progress while urging the government to accelerate key reforms and finalize debt restructuring agreements to secure long-term stability and investor confidence.

It added that progress in meeting key commitments under the IMF-supported program will be formally assessed in the context of the Fifth Review of the EFF. The timing of the Fifth Review will be discussed with the government.

Following a five-day mission in Colombo, IMF Mission Chief Evan Papageorgiou stated that Sri Lanka’s economic reform program, supported by the Extended Fund Facility (EFF), is yielding “commendable outcomes.” Real GDP growth reached 4.8% year-on-year in the first quarter of 2025, surpassing expectations, while headline inflation dropped to -1.1% in Q2, signaling a return to price stability.

Gross international reserves stood at a robust USD 6.0 billion by the end of June, bolstered by improved tax revenue collection—particularly from VAT and levies on imported motor vehicles.

However, Papageorgiou cautioned that “downside risks have increased” due to global trade uncertainties, potential export tariffs, and geopolitical tensions. He emphasized the need to maintain reform momentum to safeguard Sri Lanka’s economic gains.

"This underscores the critical importance of maintaining the reform momentum and the efforts to rebuild fiscal space and external buffers. These reforms will enhance Sri Lanka’s resilience to shocks and safeguard the hard-won economic progress to date. Should such shocks materialize, they will be addressed within the contours of the EFF program," he said.

He emphasized that maintaining macroeconomic stability requires sustained efforts to raise fiscal revenues.

"To continue meeting the medium-term primary balance objective of 2.3 percent of GDP—a key requirement for restoring Sri Lanka’s debt sustainability—the 2026 budget should be underpinned by strong revenue measures and appropriate spending allocations, consistent with program parameters," he said.

Strengthening the tax exemption frameworks, boosting tax compliance, broadening the tax base, and enhancing public financial management, including to avoid the reemergence of expenditure arrears, are important.

Key IMF Recommendations:

Debt Restructuring: Encourage a swift completion of bilateral agreements with the remaining official and commercial creditors to restore debt sustainability and regain investor confidence.

Public Debt Management Office: Called for faster operationalization to enhance fiscal oversight.

Governance Reforms: Stressed the importance of implementing anti-corruption measures outlined in the government’s action plan.

Fiscal Discipline: Advocated for strong revenue measures in the 2026 budget to meet the medium-term primary balance target of 2.3% of GDP.

Social Protection: Highlighted the need to improve targeting and adequacy of support for vulnerable populations.

Energy Pricing: Recommended maintaining cost-recovery pricing to reduce fiscal risks.

Monetary Policy: Urged prudence and independence of the Central Bank, with continued reserve accumulation and exchange rate flexibility.

The IMF Mission Chief added that resolving non-performing loans, strengthening governance and oversight of state-owned banks, and improving the insolvency and resolution frameworks are important to sustainably revive credit growth and support private sector development.

The IMF also underscored the importance of structural reforms to liberalize trade and investment, boost competitiveness, increase female labor force participation, and address climate change.