The International Monetary Fund (IMF) has reported that Sri Lanka recorded a 4.8% growth rate in the first quarter of 2025, exceeding expectations. Inflation, currently at -1.1%, is said to be “gradually returning to target,” according to the IMF.
The Fund further stated that Sri Lanka’s foreign reserves reached USD 6 billion by the end of June 2025, and tax revenue collection continues to improve—driven by strong contributions from Value Added Tax (VAT) and duties on imported motor vehicles.
Despite this positive outlook, an IMF staff team that recently concluded a mission in Colombo warned of rising downside risks. These include the potential imposition of high tariffs on Sri Lankan exports, ongoing trade policy uncertainty, and intensifying geopolitical tensions.
“This underscores the critical importance of maintaining reform momentum and continuing efforts to rebuild fiscal space and external buffers,” the IMF emphasized. “These reforms are essential to strengthen Sri Lanka’s resilience to economic shocks and to preserve the hard-won progress achieved so far. If such shocks were to materialize, they would be managed within the framework of the Extended Fund Facility (EFF) programme.”
The IMF mission, led by Evan Papageorgiou, Mission Chief for Sri Lanka, visited Colombo from July 21 to 25. The team reviewed recent macroeconomic trends and assessed the progress of economic and financial policies under the government’s reform programme supported by the EFF.
Mr. Papageorgiou noted in a statement that the Sri Lankan authorities’ economic reform programme is producing commendable outcomes. However, he stressed that maintaining macroeconomic stability will require sustained efforts to boost fiscal revenues.
“To continue meeting the medium-term primary balance target of 2.3% of GDP—a key pillar for restoring debt sustainability—the 2026 budget must include robust revenue-generating measures and strategically aligned spending, consistent with program parameters,” he stated.
The IMF highlighted the importance of several structural fiscal reforms, including strengthening tax exemption frameworks, enhancing tax compliance, broadening the tax base, and improving public financial management systems to prevent the recurrence of expenditure arrears.
Furthermore, the Fund underscored the need for upcoming legislation on public-private partnerships, state-owned enterprises, public procurement, and public asset management to align with the Public Financial Management Act and international best practices.
Cost-reflective energy pricing should be sustained to minimize fiscal risks and ensure the financial viability of energy utilities. Simultaneously, it is crucial to safeguard the poor and vulnerable by improving the targeting, coverage, and adequacy of social support mechanisms, the statement added.
Commenting on public debt, the IMF noted that Sri Lanka’s debt restructuring process is nearing completion. The Fund urged swift finalization of bilateral agreements with the remaining official and commercial creditors to restore debt sustainability and rebuild investor confidence. It also emphasized the need to expedite the operationalisation of the Public Debt Management Office.
On monetary policy, the IMF advised continued prudence with a focus on price stability. It stressed the importance of preserving the independence of the Central Bank, including avoiding monetary financing of the budget. Accumulating foreign reserves and maintaining exchange rate flexibility were also listed as key policy priorities.
Additional recommendations included resolving non-performing loans, enhancing governance and oversight of state-owned banks, and strengthening insolvency and resolution frameworks to support private sector development and credit growth.
The IMF further called for the steadfast implementation of governance reforms outlined in the government’s action plan, describing them as crucial for addressing corruption risks. Structural reforms aimed at liberalizing trade and investment, boosting competitiveness, increasing female labour force participation, and addressing climate change were also noted as essential to raising the country’s long-term growth potential.
Finally, the IMF stated that progress under the IMF-supported programme will be formally assessed during the Fifth Review of the EFF. The timing of this review will be discussed with the government.
