The International Monetary Fund (IMF) last week came up with some significant comments on Sri Lanka’s economic policies. The comments came at a virtual media briefing after the global lender approved the third review of the $3 billion, 48-month bailout package and after the disbursement of the fourth tranche of $334 million.
A careful analysis of the comments shows that the global lender is optimistic on Sri Lanka’s economic recovery from the unprecedented bankruptcy in 2022. This is contrary to what was spread during the campaign in the run-up to the last year’s Presidential and Parliamentary elections.
Last week’s comments also show that the IMF has left the policy package that should be selected within the hands of the incumbent Government. This is also in contrary to what we have heard in the past.
Whenever, the IMF has been involved with an economic reform program, successive Governments have implemented tough policy measures, citing they were the conditions of the global lender. From introducing new tax to raising taxes, curbing Government expenditure to subsidies, and reducing the number of State-sector employees to privatising State-Owned Enterprises (SOE), the IMF was blamed for all.
But the global lender made it very clear last week. Its top official’s comments clearly say that the IMF has come up only with some macroeconomic targets including tax revenue, foreign exchange reserves, and fiscal deficits. The policies to achieve these targets are at the discretion of the Government.
Public sector, SOE reforms
When asked on concerns over the Government’s move to recruit 30,000 more people to the public sector as stated in Last month’s Budget, IMF’s Senior Mission Chief for Sri Lanka Peter Breuer said that was something the Government has to decide.
“On the size of the public sector, that’s really not for us to judge. The Government needs to sort of identify the resources it needs to provide the services that it’s expected to provide. And do all of that within the envelope of the program,” Breuer told reporters on Tuesday (4) when he addressed the virtual media briefing.
On the restructuring of the State-Owned Enterprises, the IMF said Sri Lanka can still keep them without privatising and without being a burden to the Government or taxpayers.
IMF Deputy Mission Chief for Sri Lanka Katsiaryna Svirydzenka said the most crucial element of the SOEs restructuring is that “The SOEs are managed in a prudent manner so as to avoid the accumulation of losses or debts which would eventually need to be repaid by the taxpayers”.
“And in that sense, the SOEs can be managed prudently while remaining State owned or they can be divested partially or completely,” Svirydzenka told reporters at the same media briefing.
“We are reassured by the authorities’ commitment to ensure that these enterprises do not become a burden for the Budget or for the Government debt. In terms of other key elements under the program has been the cost reflective pricing of services provided by so especially in the areas of electricity and fuel prices.”
“Other commitments under the program include making the SOEs more transparent, in particular by publishing audited financial statements of the largest SOEs in a timely manner.”
Svirydzenka also said that it is important that the consumers of services receive the best value for the price being charged to allow for the economy to grow.
“So, this involves running the SOEs in the most efficient manner and ensuring that they are following the best governance principles. So, in that sense, we’re quite satisfied with the progress.”
In its recent reports and comments, the IMF has expressed both optimism and concerns about Sri Lanka’s progress.
This balance reflects the complexity of the country’s situation, where signs of recovery coexist with persistent challenges.
The IMF’s evaluation is crucial as it provides an external perspective on Sri Lanka’s economic reforms, which aim to stabilise and eventually grow the nation’s economy after it faced its worst economic crisis in decades.
Optimism
The IMF has shed lights over where the island nation has been doing better under its bailout package. This includes economic recovery, growth prospects, improvement in foreign exchange reserves, structural reforms, legislative progress, and anti-corruption measures.
1. Economic Recovery and Growth Prospects: The IMF’s statement demonstrates cautious optimism regarding Sri Lanka’s economic recovery.
The growth is largely driven by the improvement in agriculture, manufacturing, and services, following a period of negative growth due to the pandemic, political instability, and debt crisis.
This growth is a key area of optimism for the IMF, as it signals that the underlying fundamentals of the Sri Lankan economy may be resilient enough to recover if the right policies are implemented.
Inflation has been brought under control, falling below the Central Bank’s five percent target, which reflects an effective monetary policy and the country’s successful efforts in containing price pressures.
2. Improvements in International Reserves: One of the most promising signs from the IMF’s report is the increase in Sri Lanka’s gross international reserves.
As of end February 2025, Sri Lanka has accumulated $6.4 billion in reserves, marking an increase of $2 billion in 14 months.
This boost is seen as a direct consequence of the country’s adherence to the IMF-backed reform program, which has helped stabilise the balance of payments and secure external financing.
The increase in reserves is crucial for maintaining currency stability, meeting external debt obligations, and boosting investor confidence in Sri Lanka’s economic recovery.
The IMF has also highlighted that the country’s external debt situation is improving, as Sri Lanka successfully restructured part of its debt with international creditors, which has alleviated pressure on the Government’s fiscal position.
These efforts are crucial steps in regaining economic stability and securing access to international financial markets.
3. Structural Reforms and Legislative Progress: Another area of optimism revolves around Sri Lanka’s commitment to structural reforms, which are seen as essential for addressing long-term economic challenges.
The IMF has positively assessed the approval and implementation of several key legislative measures aimed at improving fiscal governance and public financial management.
The Public Financial Management (PFM) Act and the Public Debt Management (PDM) Act have been passed, which will help improve transparency, accountability, and debt management in the country.
The IMF has stressed that the successful implementation of these laws will significantly improve fiscal discipline and the sustainability of public finances.
These reforms are seen as vital to avoiding the kind of fiscal mismanagement that contributed to Sri Lanka’s economic crisis.
The IMF has been optimistic about the potential long-term benefits of these legislative actions, particularly in the areas of tax administration and debt transparency.
4. Governance Enhancements and Anti-Corruption Measures: Sri Lanka’s governance reforms are another positive aspect highlighted by the IMF.
The formulation of the National Anti-Corruption Agenda is one of the key measures cited as an indication that the country is serious about tackling governance issues that have plagued its public sector.
The IMF recognises that strong anti-corruption measures are essential for ensuring the success of Sri Lanka’s economic reforms, as they help create a more transparent and efficient public sector.
The IMF’s support for governance reforms signals that the institution believes Sri Lanka can break away from the systemic issues that contributed to its economic downfall. The IMF has emphasized that effective governance reforms will also improve investor confidence, which is crucial for Sri Lanka to attract foreign direct investment and secure long-term economic growth.
Concerns
The global lender has raised concerns over Sri Lanka’s fiscal sustainability, tax reforms, energy pricing, subsidy reforms, debt sustainability, and risks to the economic outlook.
1. Fiscal Sustainability and Tax Reforms: Despite the IMF’s optimism regarding some aspects of Sri Lanka’s recovery, fiscal sustainability remains a major concern.
One of the primary areas of concern is the Government’s ability to generate sufficient revenue to fund essential public services and reduce its reliance on external debt.
The IMF has cautioned against the introduction of new tax exemptions, which could erode the country’s revenue base. Sri Lanka’s tax-to-GDP ratio has historically been low, and the IMF stresses the importance of broadening the tax base and improving tax collection to ensure long-term fiscal sustainability.
The IMF also has warned that without significant revenue reforms, Sri Lanka may struggle to meet its fiscal targets and may find itself in a precarious situation in the future, if global economic conditions worsen.
The IMF has, therefore, called upon Sri Lanka to continue its focus on tax reforms, particularly in reducing tax exemptions that disproportionately benefit certain sectors and high-income groups. The IMF is also advocating for improvements in tax compliance and administration.
2. Energy Pricing: Energy pricing is another area of concern that the IMF has consistently highlighted. Sri Lanka’s energy sector has long been a source of fiscal strain, with the Government subsidising energy prices to keep them artificially low.
The IMF has repeatedly emphasized the need for Sri Lanka to move towards cost-recovery energy pricing to avoid placing an undue burden on public finances.
The IMF warns that continued energy subsidies could lead to fiscal imbalances, especially if oil prices rise or if the global economy faces downturns.
The IMF’s concern is that failing to implement energy pricing reforms could lead to more borrowing, which would exacerbate the country’s debt problem. While the IMF acknowledges that this will be politically challenging, it maintains that these reforms are necessary for fiscal consolidation and long-term economic stability.
“That tariff cut meant that the Ceylon Electricity Board (CEB) wouldn’t be able to avoid any losses,” Breuer said.
“So these cuts, essentially, at least on a forward-looking basis, implied that losses would be run now of course. These profits and losses by the electricity company depend on many factors, including the weather, rain and so forth,” he said.
“So what turns out ex post may be different from what happens ex ante, but this is a concern that we have because it could mean that that starts building up again in the electricity company. That could ultimately become a contingent liability for the Government.”
“This is something that, of course, Sri Lanka has experienced before, and avoiding this and making sure that consumers on average pay for how much it costs to generate and distribute the electricity is an important part of the program.”
3. Debt Sustainability: Sri Lanka’s debt sustainability remains one of the IMF’s most significant concerns. Although the country has made some progress in restructuring its debt with major bilateral creditors, such as China and India, the IMF has warned that the completion of these negotiations is still critical for restoring debt sustainability.
Three days after the IMF raised its concern, Sri Lanka inked its first formal bilateral debt restructuring deal with Japan on Friday (7).
The IMF has highlighted the importance of finalising agreements with all creditors to ensure that Sri Lanka can maintain manageable debt levels and avoid a recurrence of its debt crisis.
The global lender has stressed that addressing the debt overhang and implementing a credible debt restructuring framework will be critical for restoring investor confidence in Sri Lanka.
Failure to complete debt restructuring could lead to further fiscal and balance-of-payments pressures, undermining the economic recovery.
The IMF has, therefore, urged Sri Lanka to continue its efforts to reach agreements with remaining creditors and finalise debt restructuring deals as soon as possible.
4. Risks to the Economic Outlook: While the IMF acknowledges the positive signs in Sri Lanka’s economy, it also warns of several risks that could undermine the country’s recovery.
These risks include global economic uncertainty, particularly the potential for a slowdown in global growth or an increase in commodity prices.
Sri Lanka is vulnerable to external shocks, such as natural disasters or geopolitical tensions, which could disrupt its fragile recovery.
The IMF has also pointed to the potential for social unrest, as the Government’s reform program may lead to short-term hardships for certain segments of the population, particularly low-income groups.
The IMF has stressed that the Government must manage these risks carefully by implementing social protection measures and ensuring that the benefits of economic reforms are shared.
