IMF Sees Strong Sri Lankan Recovery but Issues Warning Over Fuel Prices and Global Shocks

COLOMBO (News 1st); Sri Lanka has reached a staff-level agreement with the International Monetary Fund (IMF) on the Seventh Review of its Extended Fund Facility (EFF) programme, paving the way for a fresh US$345 million disbursement, while the IMF has also stressed that domestic fuel prices should continue to adjust in line with global market movements if the ongoing conflict in the Middle East exerts further pressure on energy markets.

The IMF announced that its staff and Sri Lankan authorities had concluded discussions on the Seventh Review of the country's four-year reform programme and the 2026 Article IV Consultation. However, the agreement remains subject to approval by the IMF Executive Board.

The IMF noted that prolonged tensions and conflict in the Middle East could pose significant risks to Sri Lanka's recovery and emphasized the importance of preserving cost-recovery energy pricing. It said the government should allow domestic fuel prices to move in line with international prices while ensuring targeted support for vulnerable groups through well-planned and time-bound assistance measures.

Once approved by the Executive Board, Sri Lanka will gain access to approximately SDR 254 million, equivalent to about US$345 million. This would bring total IMF disbursements under the programme to SDR 2.032 billion, or around US$2.7 billion.

According to the IMF, the Executive Board review will depend on two key conditions: the presentation of the 2027 Budget to Parliament by the Minister of Finance in line with programme objectives, and the successful completion of the financing assurances review, which includes confirming support from multilateral partners and assessing progress in debt restructuring.

The IMF said Sri Lanka's economy has demonstrated remarkable resilience despite a series of local and global shocks. Economic activity grew by 4.2 percent in the second quarter of 2026, marking eleven consecutive quarters of expansion. Headline inflation remained in single digits at 8 percent year-on-year in September, while gross official reserves rose to US$6.9 billion by the end of August 2026.

The Fund also highlighted that banks remain well-capitalized and profitable, fiscal performance during the first half of the year was strong, and the country's debt restructuring process is largely complete.

Despite these gains, the IMF warned that significant downside risks remain. Apart from uncertainty surrounding the duration and intensity of the Middle East conflict, risks also stem from global trade policy developments and the potential impact of El Niño-related weather conditions.

The IMF stressed that maintaining macroeconomic stability in such an environment would require disciplined policymaking and continued implementation of reform measures. It added that, should the Middle East conflict trigger stronger inflationary pressures, authorities should be prepared to tighten monetary policy to prevent inflation expectations from becoming entrenched.

The Fund further called on Sri Lanka to stay committed to its broader reform agenda, including the development of a medium-term revenue strategy to strengthen tax collection, improve efficiency and fairness in the tax system, and provide greater certainty for investors.

The IMF also encouraged continued efforts to strengthen public investment management, remove bottlenecks affecting capital expenditure projects, and accelerate recovery and reconstruction activities linked to Cyclone Ditwah.

Among other priorities identified by the Fund were maintaining exchange rate flexibility to absorb external shocks and build reserves, preserving the country's anti-corruption framework, liberalizing trade, modernizing business and labour regulations, expanding access to finance, advancing digital public infrastructure, and addressing key infrastructure gaps.