IMF Praises SL’s Economic Recovery with warning against policy errors
By: Staff Writer
March 03, Colombo (LNW): The International Monetary Fund (IMF) has commended Sri Lanka’s significant economic recovery, describing it as “remarkable” while cautioning against policy missteps. Following the Third Review under its Extended Fund Facility (EFF), the IMF approved the release of $334 million, bringing Sri Lanka’s total disbursement under the program to $1.34 billion.
Kenji Okamura, the IMF’s Deputy Managing Director, acknowledged that Sri Lanka’s economic reforms are yielding positive results. He emphasized, however, that maintaining this momentum is crucial to ensure long-term stability. The EFF, a four-year arrangement approved in March 2023, is designed to help Sri Lanka restore macroeconomic balance, manage its debt, protect vulnerable groups, rebuild reserves, and implement structural reforms focused on governance and growth.
The IMF noted key economic improvements, including low inflation, rising revenue collection, and increasing foreign reserves. Economic growth has averaged 4.3% since rebounding in the third quarter of 2023, with real GDP projected to recover 40% of the losses incurred between 2018 and 2023 by the end of 2024. Growth is expected to continue in 2025.
Despite these gains, the IMF warned that Sri Lanka remains economically vulnerable, making sustained reforms essential. Okamura stressed that there is no room for policy errors, urging the government to continue its efforts to maintain macroeconomic stability and debt sustainability while fostering inclusive growth.
The IMF highlighted that while program performance has been strong, with most quantitative targets met, social spending remains below the required levels. Ensuring steady revenue collection is vital for fiscal stability and the continuation of essential government services. To achieve this, the IMF recommended improving tax compliance and avoiding tax exemptions.
The organization also underscored the importance of directing social spending toward those most in need to promote inclusive growth within the country’s limited fiscal space. Additionally, timely implementation of cost-recovery electricity pricing is necessary to manage fiscal risks associated with state-owned enterprises. Efficient capital expenditure within the fiscal framework would further contribute to long-term growth.
Debt restructuring efforts have also made notable progress, with the successful completion of a bond exchange marking a key step toward restoring debt sustainability. The IMF urged the Sri Lankan government to swiftly finalize agreements with bilateral and remaining creditors.
On the monetary front, the IMF emphasized maintaining price stability by avoiding monetary financing and safeguarding the independence of the Central Bank. Continuing exchange rate flexibility and gradually lifting balance of payments measures are also seen as essential to strengthening external reserves and economic rebalancing.
Finally, the IMF stressed the need for structural reforms to address long-standing economic challenges. Strengthening governance, tackling non-performing loans, improving oversight of state-owned banks, and enhancing insolvency frameworks are key priorities to revitalize credit growth and support the country’s recovery.
Sri Lanka’s economic revival is on the right path, but continued commitment to reforms will be crucial in ensuring long-term prosperity and financial stability.
