The International Monetary Fund (IMF) has approved $695 million in funding for Sri Lanka following a combined review of the island nation’s economic reform programme under the 48-month Extended Fund Facility (EFF) arrangement valued at about $2.4 billion.
The approval comes as Sri Lanka continues to deal with the economic fallout of Cyclone Ditwah and the ongoing conflict in West Asia, both of which have affected the country’s recovery trajectory.
Surging oil prices due to the war, launched by the United States and Israel on February 28, have heavily impacted many import-dependent Asian countries.
In a statement issued after the IMF Executive Board’s decision, Kenji Okamura, Deputy Managing Director of the IMF, said, “Sri Lanka's strong implementation under the EFF arrangement has continued despite challenging circumstances. Gains from the economic reform programme helped preserve economic resilience and provided room to respond to cyclone Ditwah and the Middle East war.”
Okamura said the US-Iran war had worsened Sri Lanka’s economic outlook.
“The US-Iran war has significantly worsened Sri Lanka's economic outlook and tilted risks to the downside.
"For 2026, growth is projected to slow down to 3 per cent. Higher oil prices would increase inflation and weaken the current account, which would also be adversely impacted by lower tourism receipts. The uncertainty, regarding the war's intensity and duration, heightens risks to the outlook," he said.
According to the IMF, fiscal easing in 2026 would be appropriate to cushion the impact of the shocks, with the Sri Lankan government already implementing a temporary relief package and allocating additional expenditure for recovery and reconstruction following Cyclone Ditwah.
“From 2027 onward, the authorities are appropriately committed to reverting to the primary balance target of 2.3 per cent of GDP, as well as complying with the primary expenditure ceiling,” he said.
On the reform agenda, Okamura noted that while programme implementation had remained largely on track, more progress was needed.
“Programme performance remains generally strong, but efforts are required to complete public financial and investment management, and electricity sector reforms,” he added. He also underscored the need for sustained revenue measures.
“Sustained revenue mobilisation is crucial to make the tax system more efficient and growth-enhancing and should be spearheaded by developing a medium-term revenue strategy.”
While debt restructuring was nearing completion, concerns remained over long-term sustainability.
“Debt restructuring is nearing completion, but debt sustainability risks remain high,” he said.
He further stressed the need for monetary policy to focus on inflation control and external resilience.
“Monetary policy should continue prioritising price stability. Greater exchange rate flexibility and gradually phasing out the balance-of-payments measures remain critical to rebuild external buffers and resilience,” he said.
Okamura also called for calibrated structural reforms and renewed infrastructure spending to improve investment conditions and support economic growth.
“well-calibrated structural reforms and renewed public infrastructure are also needed to improve the investment climate and lift growth potential.”
Cyclone Ditwah struck Sri Lanka in November last year, causing widespread devastation and claiming more than 600 lives. According to a World Bank assessment, the disaster caused direct damages estimated at $4.1 billion.
(With inputs from AFP, PTI)