FINANCIAL CHRONICLE – The International Monetary Fund (IMF) has announced the approval of a payment of $695 million to Sri Lanka as part of its ongoing program, despite the country facing increased import restrictions and failing to meet some external payment obligations.
According to the IMF’s statement, the country did not adhere to certain performance criteria related to avoiding new external payment arrears or escalating import restrictions. However, it noted that all quantitative performance criteria for the end of December 2025 were satisfied, and while most structural benchmarks were met, some were implemented later than planned.
The IMF did not provide details regarding the missed payments, though it was reported that payments to Australia were disrupted due to a cyberattack. In response to a significant depreciation of its currency in 2026, Sri Lanka has implemented import surcharges on vehicles under a ‘flexible exchange rate’ system. Critics argue that this approach allows the central bank, which is an entity of the state, to operate in unpredictable ways, undermining legal norms and democratic principles.
The central bank plays a significant role in the foreign exchange market by purchasing dollars to prevent the currency from appreciating and monetizing the balance of payments. Despite claims that the exchange rate is determined by market forces, critics argue that the central bank’s interventions contradict this assertion. The bank has promised to mitigate excessive volatility, but it has been accused of failing to honor the banknotes it issued when there are minor shocks, leading to interpretations of its policies as prioritizing interest rates over stability.
Prior to commencing the IMF program, Sri Lanka raised interest rates due to a sharp decline in its currency, which disturbed external trade and imposed additional costs. Analysts indicate that the exchange rate has experienced fluctuations, with the central bank taking a more passive role at times. Given the tensions between monetary policy and exchange rate strategies last year, experts warned of potential restrictions on vehicle imports as the ‘flexible’ exchange rate faced challenges.
The falling currency has increased food and energy prices, disproportionately affecting the vulnerable segments of the population and raising subsidy costs, which threaten to destabilize government finances and exacerbate social unrest while challenging the credibility of economic reforms.
The IMF stated that “fiscal easing in 2026 is appropriate in response to the shocks,” highlighting that the government is enacting a temporary relief package and allocating additional funds for recovery and reconstruction efforts following Cyclone Ditwah. From 2027 onwards, the authorities are committed to returning to a primary balance target of 2.3 percent of GDP, alongside adhering to primary expenditure limits.
In South Asia, Bhutan, Nepal, and the Maldives exhibit the most stable monetary arrangements, characterized by minimal bureaucratic control over interest rates. Among these, the Maldives is noted for having the strongest monetary anchor and the highest level of prosperity, although its monetary authority’s operational framework has been criticized for flaws following recent monetary policy updates that have led to more inflationary practices.
The IMF’s full statement details that the Executive Board has completed the combined fifth and sixth reviews of Sri Lanka’s economic reform program, which is supported by a four-year Extended Fund Facility (EFF) arrangement. This completion allows for the disbursement of SDR508 million (approximately $695 million), raising the total under this arrangement to SDR1.778 billion (around $2.4 billion).
The EFF arrangement, approved on March 20, 2023, aims to support Sri Lanka’s reform initiatives to sustainably restore macroeconomic stability by achieving fiscal and debt sustainability while protecting vulnerable populations, ensuring price and financial sector stability, rebuilding external buffers, enhancing governance, and advancing growth-oriented structural reforms.
After discussions within the Executive Board, Deputy Managing Director Kenji Okamura released a statement praising Sri Lanka’s strong adherence to the EFF arrangement despite difficult conditions. The economic reform program has fostered resilience and enabled a response to challenges such as Cyclone Ditwah and conflicts in the Middle East, which have negatively impacted the country’s economic outlook. Projections for 2026 indicate a growth slowdown to 3 percent, with rising oil prices likely to increase inflation and affect the current account, compounded by declining tourism revenue.
In light of these challenges, the IMF has emphasized the necessity of continued efforts to finalize public financial management and electricity sector reforms while ensuring sustained revenue mobilization to enhance tax efficiency and support growth. Ongoing debt restructuring is approaching completion, yet risks to debt sustainability remain significant.
Finally, the IMF reiterated that monetary policy should focus on maintaining price stability. It stressed the importance of greater exchange rate flexibility and the gradual removal of balance-of-payments measures to restore external buffers and resilience, while advocating for well-designed structural reforms and renewed public investment to improve the investment climate and boost growth potential.
