IMF urges Sri Lanka to sustain reforms as bailout program nears final stage

Sri Lanka must accelerate reforms and maintain prudent economic policies as it enters the final phase of its 3 billion U.S. dollar International Monetary Fund Extended Fund Facility program, IMF Resident Representative Martha Woldemichael said.

Speaking at a recent virtual forum in Colombo, Woldemichael said Sri Lanka’s program performance remained generally strong, but debt vulnerabilities were still high.

She said completing debt restructuring and sustaining reforms would be essential to protect macroeconomic stability.

According to the IMF, Sri Lanka met all end-December 2025 quantitative performance criteria and indicative targets except the continuous criterion on new external payment arrears. The breach resulted from a 2.5 million dollar cybercrime-related disruption to a debt payment to Australia.

Sri Lanka also breached a requirement not to impose or intensify import restrictions for balance-of-payments purposes after introducing a temporary 50 percent surcharge on Customs duties on some motor vehicle imports in May.

The IMF supported waivers for both breaches, citing their limited and temporary nature.

The IMF said external pressures had complicated the recovery, with tourist arrivals falling 22 percent year on year in April and fuel imports rising 75 percent in March. Inflation reached 5.4 percent in April, while the rupee depreciated about 4.5 percent between the end of February and the end of May.

The government responded with higher fuel and electricity prices, temporary subsidies and a 100 billion rupee relief package running until September 2026.

The IMF subsequently revised several program targets to accommodate Cyclone Ditwah recovery spending and the impact of the Middle East conflict, while tightening some revenue targets to preserve recent gains.

Sri Lanka has two EFF reviews remaining. The seventh review, together with the Article IV consultation, is scheduled for the fourth quarter of 2026, while the eighth review is expected in the first quarter of 2027.

The IMF said Middle East tensions, trade policy uncertainty and natural disasters remained key risks, while Sri Lanka would be expected to return to program fiscal targets from 2027.