Sri Lanka faces fresh economic uncertainty amid global shocks, says IMF
The International Monetary Fund (IMF) has warned that Sri Lanka’s fragile economic recovery is facing renewed uncertainty due to recent global shocks, as the country continues to implement a sweeping reform agenda following its historic debt default in 2022.
In a statement released at the end of an official visit to Colombo, the IMF said that while the country’s economic performance has shown signs of improvement, evolving external developments are adding pressure to an economy still emerging from crisis.
“The recent external shock and evolving developments are creating uncertainty for the Sri Lankan economy, which is still recovering from its own economic crisis,” said Evan Papageorgiou, the IMF’s mission chief for Sri Lanka.
“More time is needed to assess the impact of the global shock and how its implications for Sri Lanka can be addressed within the contours of its IMF-supported programme,” he added.
The IMF delegation visited Sri Lanka from 3 to 11 April 2025 to assess the country’s progress under the Extended Fund Facility (EFF) programme. The $2.9bn bailout package, agreed in 2023, aims to stabilise public finances and support structural reforms following the country’s financial collapse.
Mr Papageorgiou said Sri Lanka’s post-crisis rebound has been “impressive”, with the economy projected to grow by 5 percent in 2024. Inflation, which spiked during the crisis, fell to -2.6 percent at the end of March 2025, while gross official reserves rose to $6.5bn, bolstered by foreign exchange purchases by the central bank.
“Sri Lanka’s ambitious reform agenda supported by the IMF Extended Fund Facility (EFF) continues to deliver commendable outcomes,” the IMF statement said. “Substantial fiscal reforms have strengthened public finances.”
However, the IMF stressed that reform momentum must be sustained to ensure lasting macroeconomic stability and inclusive growth. “Going forward, sustaining the reform momentum is critical to safeguard the hard-won gains of the programme,” Mr Papageorgiou noted.
The Fund cautioned that elevated global uncertainty is contributing to financial market volatility, and that further analysis is needed to understand how this could affect Sri Lanka’s economic path.
The IMF urged the government to continue with revenue mobilisation, prudent budget execution, and efforts to improve tax compliance. It also advised authorities to avoid new tax exemptions and to reinstate a timely value-added tax (VAT) refund mechanism to reduce leakages and corruption risks.
The statement highlighted concerns around fiscal risk posed by state-owned enterprises, especially in the electricity sector, and called for a return to cost-recovery pricing.
“The government has an important responsibility to protect the poor and vulnerable at this uncertain time,” the IMF said. “It is important to redouble efforts to improve targeting, adequacy, and coverage of social safety nets.”
The IMF emphasised that any fiscal support must remain “well-targeted, time-bound, and within the existing budget envelope”.
While inflation remains low, the IMF said continued monitoring is needed to ensure stability and rebuild external buffers.
“Discussions are ongoing, and the authorities are encouraged to continue to make progress on restoring cost-recovery electricity pricing, strengthening the tax exemptions framework, and other important structural reforms,” the statement added.
During its visit, the IMF team held meetings with President and Finance Minister Anura Kumara Dissanayake, Prime Minister Harini Amarasuriya, Labour Minister Anil Jayantha Fernando, Deputy Finance Minister Harshana Suriyapperuma, Central Bank Governor Dr P. Nandalal Weerasinghe, Treasury Secretary K M Mahinda Siriwardana, and other senior government and central bank officials.
They also met with parliamentarians, private sector representatives, civil society organisations, and development partners.
“We would like to thank the authorities for the excellent collaboration during the mission,” Mr Papageorgiou said. “Discussions are continuing with the goal of reaching staff-level agreement in the near term to pave the way for the timely completion of the fourth review. We reaffirm our commitment to support Sri Lanka at this uncertain time.”
Sri Lanka announced its debt default in April 2022, after the country ran out of foreign reserves needed to import essential goods such as fuel and medicine. The crisis sparked mass protests and a change in political leadership. The IMF programme has since been central to efforts to stabilise the economy and restore investor confidence.