IMF approves USD 695 million to Sri Lanka

WASHINGTON: The International Monetary Fund (IMF) has approved USD 695 million in funding for Sri Lanka as the island nation grapples with the impact of Cyclone Ditwah and the war in West Asia.

The IMF's executive board has approved the amount following a combined review of Sri Lanka's economic reform programme supported by the 48-month Extended Fund Facility (EFF) arrangement of about USD 2.4 billion, a statement said.

"Sri Lanka's strong implementation under the EFF arrangement has continued despite challenging circumstances. Gains from the economic reform programme helped preserve economic resilience and provided room to respond to cyclone Ditwah and the Middle East war," Kenji Okamura, Deputy Managing Director of the IMF, said in the statement.

Okamura said the US-Iran war has significantly worsened Sri Lanka's economic outlook and tilted risks to the downside.

"For 2026, growth is projected to slow down to 3 per cent. Higher oil prices would increase inflation and weaken the current account, which would also be adversely impacted by lower tourism receipts. The uncertainty, regarding the war's intensity and duration, heightens risks to the outlook," he said.

Okamura said fiscal easing in 2026 is appropriate in response to the shocks, and the government is implementing a temporary relief package, while also allocating additional spending to support recovery and reconstruction following Cyclone Ditwah.

"From 2027 onward, the authorities are appropriately committed to reverting to the primary balance target of 2.3 per cent of GDP, as well as complying with the primary expenditure ceiling," he said.

"Programme performance remains generally strong, but efforts are required to complete public financial and investment management, and electricity sector reforms," he added.

Okamura said sustained revenue mobilisation is crucial to make the tax system more efficient and growth-enhancing and should be spearheaded by developing a medium-term revenue strategy.

"Debt restructuring is nearing completion, but debt sustainability risks remain high," he said.

"Monetary policy should continue prioritising price stability. Greater exchange rate flexibility and gradually phasing out the balance-of-payments measures remain critical to rebuild external buffers and resilience," he said.

Okamura said well-calibrated structural reforms and renewed public infrastructure are also needed to improve the investment climate and lift growth potential.

Cyclone Ditwah struck Sri Lanka in November last year and caused catastrophic damage in the island nation, killing more than 600 people. A World Bank report pegged direct damages at USD 4.1 billion.
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