The National People’s Power (NPP) government is heading into next month’s International Monetary Fund (IMF) evaluation caught in a dangerous paradox: macroeconomic stability is improving, but the living standards of ordinary Sri Lankans remain under severe pressure, former Finance Minister and MP Ravi Karunanayake has warned.
Karunanayake argues that securing the next IMF tranche requires the government to maintain strict fiscal discipline and achieve the programme’s 15 percent of GDP revenue target. Yet pushing austerity further could test the limits of public endurance and transform technical economic stability into deeper social discontent.
For ordinary citizens, he says, the economy may be stable but increasingly unlivable. Fuel and gas queues have disappeared, but the ability to purchase these essentials has effectively been rationed by household incomes. Inflation has fallen to 6.8 percent, but prices have not fallen with it. They have merely stabilised at historically elevated levels, while real wages have failed to recover from the cumulative inflation surge of more than 100 percent in recent years.
The mandated 18 percent VAT on essential goods and aggressive personal income-tax brackets have further eroded disposable income. Families that were comfortably middle-class in 2021 are now being pushed into survival mode, cutting expenditure on nutrition, healthcare and private education.
The government has nevertheless made substantial progress on external debt, completing 94 percent of its public external debt restructuring. But Karunanayake warns that the period after the IMF programme concludes in December 2026 and particularly beyond mid-2027 could prove far more difficult.
The end-2026 gross reserve target of US$8 billion appears mechanically achievable through exporter-conversion requirements and high tariff surcharges, including the extended 50 percent vehicle-import surcharge. Reaching the government’s projected US$15.1 billion reserve target by 2028, however, will be considerably harder as restructured debt servicing resumes.
Karunanayake believes Sri Lanka could then face a balance-of-payments cliff requiring immediate negotiations for an 18th IMF successor programme to prevent a secondary default.
He also questions whether headline reserve figures accurately represent usable foreign exchange. Gross official reserves of around US$6.59 billion include a non-usable US$1.4 billion, or RMB10 billion, swap with the People’s Bank of China, as well as short-term domestic commercial-bank swaps. Unencumbered net international reserves remain negative at US$1.268 billion.
The Central Bank has improved its IMF position by purchasing excess dollars from commercial banks with newly created rupees. Net dollar purchases reached US$348.6 million in July alone, helping push NIR above the IMF review-period floor of negative US$2.035 billion by nearly US$700 million.
But Karunanayake warns that this achievement comes with a social cost. The Central Bank’s surprise 100-basis-point policy-rate increase to 8.75 percent in May 2026 helped anchor inflation expectations amid Middle Eastern energy shocks and stabilised the rupee around Rs.332.75–332.95 per US dollar. At the same time, he argues, tighter monetary policy has choked credit expansion and squeezed domestic SMEs.
The central question now is whether Sri Lanka can preserve IMF credibility without pushing households and businesses beyond their breaking point.
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