By: Staff Writer
December 18, Colombo (LNW): Sri Lanka’s appeal for US$200 million in disaster financing has become a critical test of whether emergency needs can coexist with long-term reform commitments under the IMF programme. The Executive Board’s December 19 meeting to consider funding under the Rapid Financing Instrument (RFI) comes as the country struggles to reconcile post-disaster spending pressures with rigid fiscal and monetary benchmarks embedded in the Extended Fund Facility (EFF).
Unlike EFF tranches, the RFI is disbursed upfront and does not involve formal programme reviews. However, policymakers and analysts caution that this technical flexibility does not equate to strategic leniency. The IMF has consistently signalled that Sri Lanka’s broader programme performance will remain under scrutiny, particularly as fiscal assumptions underpinning the 2026 budget are being fundamentally rewritten.
Cyclone Ditwah has added unexpected pressure to public finances, pushing projected government expenditure up by at least Rs. 500 billion next year. This fiscal shock has forced the postponement of the EFF review initially scheduled for mid-December. IMF officials are now expected to engage with Sri Lankan authorities in January 2026 to reassess targets, raising concerns about whether revised benchmarks will demand further fiscal tightening.
Monetary policy developments add another layer of complexity. Following the March rate cut and a shift away from strong deflationary policy, the Central Bank has struggled to build reserves at the pace originally envisaged under the IMF programme. While external debt repayments have continued, analysts argue that reserve accumulation remains insufficient relative to programme commitments.
The approval of multiple budget-support loans in December particularly from the Asian Development Bank has temporarily eased pressure. These inflows, which bypass domestic expenditure, are expected to strengthen the balance of payments or directly offset debt service obligations. Nevertheless, reliance on the Central Bank to supply dollars for government repayments has drawn criticism for blurring the lines between fiscal and monetary responsibility.
Economists also point to structural weaknesses in the IMF’s previous programme design, noting the absence of firm requirements to reduce the Central Bank’s domestic asset holdings. This, combined with political reluctance to sustain deflationary policy, has contributed to renewed pressure on the rupee and raised concerns over selective foreign exchange access for private importers.
At its core, the IMF’s position reflects institutional caution shaped by Sri Lanka’s 2022 default, which followed aggressive rate cuts, tax reductions, and expansionary policies aimed at artificial full-employment targets. The current moment, analysts argue, will determine whether Sri Lanka treats disaster financing as a temporary bridge or as another detour away from durable reform
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