IMF reaches staff-level agreement with Sri Lanka on seventh EFF review

The International Monetary Fund (IMF) and Sri Lankan authorities have reached a staff-level agreement on the seventh review of the country’s Extended Fund Facility (EFF) programme, the IMF said in a statement on Monday.

This could unlock about US$345 million in additional financing once approved by the IMF Executive Board.

IMF Mission Chief for Sri Lanka Evan Papageorgiou said the agreement followed discussions on economic policies under the four-year EFF programme as well as the conclusion of the 2026 Article IV Consultation.

The EFF arrangement, approved in March 2023, provides Sri Lanka with total financing of about US$3 billion.

The latest agreement remains subject to IMF Executive Board approval. Before that, Sri Lanka must present a 2027 Budget to Parliament that is consistent with programme parameters and complete a financing assurances review covering multilateral financing commitments and progress on debt restructuring.

Once the review is completed, Sri Lanka will gain access to SDR 254 million, equivalent to about US$345 million. This would bring total IMF disbursements under the programme to about US$2.7 billion.

The IMF said Sri Lanka’s economy had remained resilient despite successive shocks. Economic activity grew by 4.2% year-on-year in the second quarter of 2026, marking 11 consecutive quarters of growth.

Headline inflation stood at 8% year-on-year in September, while gross official reserves had risen to US$6.9 billion by the end of August. The IMF also said banks remained well capitalised and profitable, fiscal performance during the first half of 2026 was strong and debt restructuring was largely complete.

However, the Fund warned that risks remained tilted to the downside due to uncertainty over the duration and intensity of the war in the Middle East, global trade policy and the possible effects of El Niño.

The IMF said Sri Lanka should continue prudent macroeconomic policies and structural reforms to protect the gains made under the programme.

In the event of a prolonged Middle East conflict, the Fund said domestic fuel prices should be allowed to adjust in line with international prices while maintaining cost-recovery energy pricing and protecting vulnerable households.

Any support measures should be targeted, included in the Budget, carefully costed and time-bound to avoid undermining fiscal and debt sustainability, it said. Poverty-targeted cash transfers should be used to protect the most vulnerable.

The IMF also said monetary policy should be ready to tighten if the Middle East conflict generated stronger second-round inflationary pressures that threatened to destabilise inflation expectations.

Papageorgiou said further reforms were needed to strengthen revenue collection, improve the fairness and efficiency of the tax system and provide greater certainty to investors.

The IMF also called for improvements in public investment management, including measures to accelerate recovery and reconstruction following Cyclone Ditwah.

Greater exchange-rate flexibility remained important for absorbing external shocks and building reserves, while preserving the anti-corruption legislative framework was necessary to maintain public confidence, it said.

The Fund also called for trade liberalisation, modernisation of business and labour regulations, broader access to finance, improved digital public infrastructure and measures to address infrastructure gaps.

The staff-level agreement followed an IMF mission to Sri Lanka from 10 to 23 September and subsequent virtual discussions with Central Bank Governor Dr P. Nandalal Weerasinghe, Treasury Secretary Dr Harshana Suriyapperuma, Senior Economic Adviser to the President Duminda Hulangamuwa and other officials.