• Opines economy still vulnerable, critical to sustain reform momentum
• Reveals by end-2024, Sri Lanka’s real GDP has recovered 40% of loss incurred between 2018 and 2023
• Says performance under $ 3 b EFF program has been strong
• All quantitative targets for end-December 2024 met, except indicative target on social spending
• Completion of Third Review releases $ 334 m more, bringing total so far to $ 1.34 b

IMF Deputy Managing Director Kenji Okamura

The International Monetary Fund (IMF) on Friday hailed Sri Lanka’s “remarkable” recovery, prompting it to release the

$ 334 million following the Third Review, but insisted there is no room for policy errors.

“Reforms in Sri Lanka are bearing fruit and the economic recovery has been remarkable,” IMF Deputy Managing Director Kenji Okamura said.

The IMF’s Executive Board completed the Third Review under the 48-month Extended Fund Facility (EFF) arrangement, allowing the authorities to draw $ 334 million, bringing the total to $ 1.34 billion.

The EFF arrangement for Sri Lanka was approved by the Executive Board on 20 March 2023 (see Press Release No. 23/79) in an amount of SDR 2.286 billion (395% of quota or about $ 3 billion). The program supports Sri Lanka’s efforts to restore and maintain macroeconomic stability and debt sustainability while protecting the poor and vulnerable, rebuild external buffers, and enhance growth-oriented structural reforms including by strengthening governance.

The IMF said inflation remains low, revenue collection is improving, and reserves continue to accumulate. Economic growth averaged 4.3% since growth resumed in the third quarter of 2023. By end-2024, Sri Lanka’s real GDP is estimated to have recovered 40% of its loss incurred between 2018 and 2023. The recovery is expected to continue in 2025.

“As the economy is still vulnerable, it is critical to sustain the reform momentum to ensure macroeconomic stability and debt sustainability, and promote long-term inclusive growth. There is no room for policy errors,” Okamura emphasised.

He said program performance has been strong with all quantitative targets met, except for the indicative target on social spending. Most structural benchmarks due by end-January 2025 were either met or implemented with delay.

Sustained revenue mobilisation is crucial to restoring fiscal sustainability and ensuring that the Government can continue to provide essential services. Boosting tax compliance and refraining from tax exemptions are key to maintaining support for economic reforms. To ease economic hardship and ensure the poor and vulnerable can participate in Sri Lanka’s recovery, it is important to meet social spending targets and continue with reforms of the social safety net. Going forward, social support needs to be well-targeted towards the most disadvantaged so as to promote inclusive growth with limited fiscal space. Restoring cost-recovery electricity pricing without delay is needed to contain fiscal risks from State-owned enterprises. A smoother execution of capital spending within the fiscal envelope would foster medium-term growth.

The progress to advance the debt restructuring to restore Sri Lanka’s debt sustainability is noteworthy. The recent successful completion of the bond exchange is a major milestone towards restoring debt sustainability. Timely finalisation of bilateral agreements with creditors in the Official Creditor Committee and with remaining creditors is a priority now.

Monetary policy should prioritise maintaining price stability, supported by sustained commitment to prohibit monetary financing and safeguard Central Bank independence. Continued exchange rate flexibility and gradually phasing out the balance of payments measures remain critical to rebuild external buffers and facilitate rebalancing.

Resolving non-performing loans, strengthening governance and oversight of State-owned banks, and improving insolvency and resolution frameworks are important priorities to revive credit growth and support economic recovery.

Prolonged structural challenges need to be addressed to unlock Sri Lanka’s long-term potential, including steadfast implementation of governance reforms.