Hours after the second reading of the budget was passed, the International Monetary Fund (IMF) executive board approved the release of $334 million under its four-year bailout package, urging Sri Lanka to meet its tax collection targets.
A senior Treasury official stated that the IMF had highlighted Sri Lanka’s potential to generate tax revenue exceeding Rs. 900 billion, provided that revenue collection measures were effectively implemented.
“No new taxes will be imposed, nor will existing taxes be revised,” the official confirmed, adding that the IMF had also advised Sri Lanka to boost foreign direct investments (FDI).
The official further stated that revenue measures were being enforced properly, and the country was confident of securing two additional bailout tranches within the year.
On Friday, the IMF executive board approved the third review of the Extended Fund Facility (EFF) arrangement, enabling Sri Lanka to access $334 million.
Former Central Bank Governor Dr. Indrajit Coomaraswamy told The Sunday Times that the 2025 budget contained commendable steps toward fulfilling the ambitious fiscal targets agreed upon with the IMF. He particularly noted progress toward achieving the primary surplus target of 2.3% of GDP by 2025, up from 0.6% in the current fiscal year.
Dr. Coomaraswamy emphasized that the IMF’s decision was driven by Sri Lanka’s progress in maintaining price stability, backed by a commitment to prohibit monetary financing, maintain exchange rate flexibility, and implement balance of payments measures.
However, a former Treasury Secretary with extensive knowledge of IMF procedures cautioned that concerns remained over the feasibility of achieving the IMF’s targets. He noted that the 2025 budget projects total government spending at 21.8% of GDP, with a significant focus on social welfare programs and infrastructure development.
“The challenge lies in achieving these fiscal targets, as the government’s fiscal and monetary policies remain unclear despite the need for policy consistency,” he warned.
In a statement, IMF Deputy Managing Director Kenji Okamura underscored Sri Lanka’s economic vulnerabilities, stressing that structural reforms were essential to ensure macroeconomic stability, debt sustainability, and long-term inclusive growth. He also warned against policy reversals.
Dr. Coomaraswamy reiterated that enhancing tax compliance and curbing tax exemptions were critical to keeping economic reforms on track.
Professor Priyanga Dunusinghe of Colombo University observed that the IMF’s focus remained on the government’s blend of liberal macroeconomic policies with micro-level welfare interventions.
However, he noted potential inconsistencies, particularly in taxation policies, citing concerns over the removal of property taxes, which appeared contradictory given that 47% of the national budget is controlled by the wealthiest 20% of the population.
Furthermore, he warned that meeting revenue targets could prove difficult, particularly with the government’s heavy reliance on tariffs, especially on vehicle imports.
Deputy Minister of Economic Development Anil Jayantha confirmed that Sri Lanka had successfully met the conditions and structural benchmarks necessary for the IMF executive board to approve the third review.
He further stated that Sri Lanka had not only fulfilled but exceeded most quantitative targets, adding that all quantifiable objectives and most structural benchmarks due by January 2025 had been completed.
In its statement, the IMF praised Sri Lanka’s progress in debt restructuring, describing the successful bond exchange as a major milestone toward restoring debt sustainability.
The IMF urged Sri Lanka to expedite agreements with bilateral creditors, particularly those within the Official Creditor Committee, emphasizing this as its top priority.
It also highlighted the importance of monetary policy focusing on price stability and maintaining the autonomy of the Central Bank without monetary financing.
Furthermore, the IMF emphasized the need for long-term exchange rate flexibility and a phased relaxation of balance of payments controls to build foreign reserves and maintain economic equilibrium.
The IMF identified several crucial reforms necessary for Sri Lanka’s economic recovery, including:
Resolving non-performing loans
Enhancing governance in state banks
Strengthening the insolvency and resolution framework
These measures, the IMF noted, were essential for reviving credit growth and supporting economic recovery.
Additionally, the IMF urged the government to implement further governance reforms to unlock Sri Lanka’s long-term economic potential.
