The International Monetary Fund has rejected calls for an immediate reduction in Sri Lanka’s 5% inflation target while simultaneously pressing the Government to protect hard-won governance and anti-corruption reforms, creating a two-track policy challenge for the country’s economic managers.
At the conclusion of its September mission, IMF Mission Chief Evan Papageorgiou said Sri Lanka should retain the existing 5% inflation target and current accountability band during the first statutory review. He argued that the framework provides sufficient flexibility while the country remains exposed to volatile food and energy prices.
The IMF position comes as debate intensifies over whether Sri Lanka should move towards a lower inflation objective, with some officials and economists advocating a target closer to 2%.
Central Bank Governor Dr. Nandalal Weerasinghe has cautioned that moving immediately to 2% could require significantly tighter monetary policy and higher interest rates. Such a strategy, he has argued, could conflict with ambitions for stronger economic growth.
The IMF has instead indicated that a lower target could be considered after Sri Lanka establishes a longer track record of low and stable inflation. Papageorgiou said the present framework provides necessary policy flexibility during a period of elevated food and energy-price volatility.
The inflation debate, however, formed only one part of a much broader IMF assessment.
The Fund’s latest mission statement highlighted downside risks from the Middle East conflict, global trade-policy uncertainty and El Niño. It also identified medium-term revenue mobilisation, energy cost recovery, public investment and governance reforms as key priorities.
The governance dimension is particularly significant.
During the press briefing, Papageorgiou raised concerns that proposed amendments to the Anti-Corruption Act could weaken elements of the existing framework, particularly rules governing asset declarations, transparency and publication of information. The IMF said it supports reviewing legislation based on experience since 2023 but wants any amendments to preserve the effectiveness of the anti-corruption system.
The timing is important because governance reforms are embedded in the IMF programme rather than treated as peripheral institutional issues. The programme includes beneficial-ownership verification, procurement transparency, tax-exemption disclosure and measures to reduce corruption vulnerabilities within Customs.
The Government and IMF have also discussed the proposed Anti-Corruption Act amendments directly. During the Prime Minister’s meeting with the IMF delegation, attention was reportedly given to maintaining an appropriate balance between privacy and transparency in information submitted to the Commission to Investigate Allegations of Bribery or Corruption through asset declarations.
Meanwhile, the IMF has acknowledged positive economic developments. Official reserves rose to US$6.9 billion at end-August, banks remained well capitalised and profitable, and debt restructuring was largely completed.
The message from the latest mission is therefore broader than an inflation-target recommendation. Sri Lanka is being asked to maintain monetary stability while simultaneously demonstrating that economic recovery will be supported by stronger institutions, transparent public finances and credible anti-corruption safeguards.
The next stage of the Seventh Review will show how these commitments translate into concrete implementation.
The post IMF Backs Five Percent Inflation Target, Warns Against Governance Backsliding appeared first on LNW Lanka News Web.
