Renewed Confidence After Fourth Review
The International Monetary Fund (IMF) has approved the fourth review under its four-year Extended Fund Facility (EFF) for Sri Lanka, unlocking an immediate disbursement of around SDR 254 million, which translates to approximately USD 350 million. This latest funding brings the total IMF support to the country under the current program to about USD 1.74 billion. The approval signals growing confidence in Sri Lanka’s ongoing economic recovery since the EFF program’s launch in March 2023.
Strong Implementation, Minor Hurdles
The IMF Executive Board’s decision on July 1 follows positive assessments of Sri Lanka’s economic reforms. Most performance targets for March 2025 were met, including critical commitments like ensuring electric utilities recover full costs and introducing an automatic tariff adjustment mechanism. Although the country missed one target related to clearing expenditure arrears, the IMF granted waivers due to corrective actions already in place. This marks another encouraging checkpoint in a recovery program that has moved steadily forward since the crisis of 2022.
A Cautious but Bright Economic Outlook
IMF officials, including Mission Chief Evan Papageorgiou, noted that Sri Lanka is showing signs of positive growth and fiscal discipline. However, they warned of significant external risks, particularly those related to global trade uncertainties. The IMF stressed the importance of steadfast program implementation and the ability to adapt policy responses if external shocks occur. The World Bank has echoed this cautiously optimistic view, projecting economic growth around 3.5% in 2025, following a 5% rebound in 2024.
Trade Headwinds: The Apparel Sector Under Pressure
A major threat to Sri Lanka’s recovery comes from escalating U.S. trade measures. While initial tariffs of 44% on approximately USD 3 billion worth of Sri Lankan exports have been temporarily suspended, a 10% base tariff remains in effect. This is particularly damaging for the country’s crucial apparel sector, which employs hundreds of thousands. The IMF has flagged these trade developments as “significant downside risks” and emphasized the need for policies that support industries and workers most affected.
Debt Restructuring Nears Completion
Sri Lanka is in the final stages of restructuring approximately USD 22.5 billion in foreign debt. Notable progress includes a preliminary agreement with official creditors, including China, covering about USD 4.75 billion. Negotiations with private bondholders are also advancing. Completing this process is critical for restoring long-term debt sustainability and securing continued access to international funding sources.
Stronger Reserves and Fiscal Reforms
Thanks to comprehensive economic reforms and fiscal consolidation, Sri Lanka’s foreign exchange reserves reached approximately USD 6.5 billion by March 2025. The central bank’s commitment to building reserves and maintaining exchange rate stability has helped restore confidence in the financial system. On the fiscal front, authorities have increased power tariffs, tightened tax exemptions, and prioritized spending on essential services, all while balancing the need to rebuild financial buffers.
Balancing Reform With Social Protection
The IMF has consistently emphasized that economic stabilization must be accompanied by strong social protection. While Sri Lanka has made strides in targeting support to vulnerable populations, gaps remain. The IMF has recommended better budgeting for social safety nets and clearer program design to ensure that those most in need receive assistance. This balancing act between fiscal consolidation and social equity will be critical in the years ahead.
From Crisis to Growth: The Turnaround Story
The journey from the economic collapse of 2022, marked by fuel shortages, skyrocketing inflation, mass protests, and a sovereign default, to today’s cautiously stable environment has been extraordinary. Inflation has declined, the Sri Lankan rupee has stabilized, and growth resumed in 2023. The IMF’s latest funding release is not just a financial boost but a strong signal of trust in Sri Lanka’s macroeconomic management.
Lessons From Past Reviews and Global Precedents
Each of Sri Lanka’s successful reviews under the IMF program has unlocked critical funding tranches, starting with the first review in December 2023. These evaluations have highlighted strong progress in areas such as anti-corruption reforms, debt transparency, and central bank independence. Other countries that underwent similar IMF-supported recoveries, such as South Korea and Greece, used these programs as turning points for broader reforms. Sri Lanka now has the opportunity to do the same.
Looking Ahead: Challenges and Milestones
Key priorities remain: finalizing debt restructuring agreements, aligning the 2025 budget with IMF program goals, maintaining sufficient reserve buffers, and managing inflationary pressures. The government must also remain diplomatically active, particularly in mitigating global trade headwinds and securing continued international support. Discussions at IMF-World Bank meetings and bilateral talks have played a vital role in reinforcing Sri Lanka’s credibility on the world stage.
Why This Matters
The approval of this USD 350 million disbursement reflects growing international faith in Sri Lanka’s recovery, but it also comes with clear expectations. Continued success could eventually restore access to global capital markets and reduce dependency on IMF support. However, failure to deliver on reforms could lead to renewed volatility, inflation, and political unrest. The country is at a crossroads where the stakes, both economic and social, are high.
Bottom Line
Sri Lanka is emerging from one of the most severe economic crises in its history, and the latest IMF disbursement is a strong vote of confidence in its progress. However, challenges remain. By finalizing debt deals, sustaining reform momentum, and protecting the most vulnerable, the country can move from recovery to long-term stability. The coming months will be critical in determining whether this IMF-backed turnaround becomes a lasting success story.
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