The International Monetary Fund (IMF) and Sri Lanka have reached a major staff-level agreement worth approximately $347 million in financing, marking a crucial step in the ongoing economic reform program undertaken by Sri Lanka under the Extended Fund Facility (EFF) arrangement. This agreement concludes the fifth review of Sri Lanka’s reform program, which is part of a broader $3 billion support initiative aimed at stabilizing and revitalizing the Sri Lankan economy after a severe crisis.Â
The discussions for this agreement were led by Evan Papageorgiou, head of the IMF mission to Sri Lanka. The staff-level accord is now pending the approval of the IMF Executive Board, contingent on critical conditions such as the parliamentary approval of Sri Lanka’s 2026 Appropriation Bill aligned with program parameters and the completion of a financing assurances review to confirm the contributions from multilateral partners and assess progress with the country’s debt restructuring. Upon approval, this new tranche of financing will bring the total IMF disbursements under the arrangement to about SDR1.52 billion (approximately $2.04 billion).Â
Strong GDP growth & inflation stabilization
Sri Lanka’s economic situation has shown promising improvement since its worst crisis in recent history, which was triggered by an acute shortage of foreign currency reserves about three years prior. The IMF highlighted Sri Lanka’s strong rebound, with real GDP growing by an annualized 4.8 percent in the first half of 2025. Inflation has also stabilized, with September 2025 figures showing a year-over-year increase of only 1.5 percent. The country’s foreign exchange reserves have improved substantially, reaching $6.1 billion by the end of September 2025. Fiscal performance has been solid, particularly supported by revenues from motor vehicle import taxes, which have significantly contributed to strengthening public finances.
The IMF recognized the considerable progress made in Sri Lanka’s debt restructuring efforts and overall fiscal management, which are critical to maintaining debt sustainability and economic stability. However, the IMF urged the continuation and acceleration of reforms, including enhancing public financial management, improving governance and transparency of State-Owned Enterprises (SOEs), broadening the tax base, enforcing tax compliance, and protecting vulnerable segments of society. The Fund emphasized the need for Sri Lanka to finalize its debt agreements with creditors while maintaining monetary discipline to anchor the economy against external shocks in a volatile global environment marked by trade policy uncertainties and geopolitical tensions.
Linking financial aid to debt relief
During the mission, IMF officials met with key Sri Lankan leaders. The leaders included President Anura Kumara Dissanayake, Prime Minister Harini Amarasuriya, and Central Bank Governor Nandalal Weerasinghe. These engagements reaffirmed the mutual commitment to advancing the reform agenda. They aim to support sustainable economic growth and long-term resilience. The IMF reiterated its support for Sri Lanka’s ambitious reform program. It noted that sustained momentum in implementing these policies is essential. This momentum is crucial for securing macroeconomic stability and improving the country’s vulnerability to global economic uncertainties.
This latest agreement is a continuation of the Fund’s multi-year Extended Fund Facility arrangement for Sri Lanka. It was initially approved in March 2023 for about SDR2.3 billion, which is around $3 billion. The program’s objectives are to restore macroeconomic stability and debt sustainability. It also aims to safeguard financial stability and protect vulnerable populations. Additionally, the program promotes structural reforms to address long-standing issues such as corruption and growth constraints. The IMF’s financial assistance is closely linked to debt relief efforts from both official and private creditors. These efforts are necessary to close financing gaps and ensure the country remains on a sustainable fiscal path.
Commitment to reforms
In the months leading to this fifth review, Sri Lanka had already secured several tranches of financing under the program. This latest tranche of $347 million represents a vital infusion to support ongoing reforms and recovery efforts. The successful completion of these reviews demonstrates the government’s commitment to sound policy implementation and structural reforms. These efforts have been instrumental in restoring investor confidence and economic stability.
Looking forward, the IMF has stressed the importance of Sri Lanka’s 2026 budget aligning with the Fund’s parameters. It also emphasizes reinforced revenue collection strategies and efficient public expenditure management. Tax reforms aimed at expanding the tax base and strengthening compliance measures remain a priority to improve fiscal health. Additionally, efforts to enforce tax exemption rules and enhance public financial management systems are essential elements of the reform agenda, aimed at bolstering transparency and fiscal discipline.
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