IMF tranche of $695 million approved despite two conditions not being met

Despite Sri Lanka failing to meet two key conditions, the International Monetary Fund (IMF) has approved a financial facility of USD 695 million. The Executive Board of the International Monetary Fund made this decision after successfully completing the fifth and sixth combined reviews under the 48-month Extended Credit Facility for the country.

However, the Fund states that Sri Lanka has been unable to meet the continuous performance criteria related to not incurring new external payment arrears and not imposing new import restrictions or intensifying existing ones.

The Executive Board of the International Monetary Fund had approved an Extended Credit Facility of USD 3 billion for Sri Lanka on March 20, 2023. With this latest tranche, the total financial assistance provided by the International Monetary Fund to the country so far reportedly rises to USD 2.4 billion. Under the Extended Credit Facility program, Sri Lanka has generally shown strong performance and has also completed prior actions to adjust electricity tariffs to cover fuel and cost.

Furthermore, the statement released by the International Monetary Fund indicates that Sri Lanka has met all quantitative performance criteria set for the end of December 2025, and many structural benchmarks have also been implemented as scheduled or with minor delays. Despite adverse economic conditions arising from the ongoing war in the Middle East and the impact of Cyclone 'Ditwa', the Fund expects Sri Lanka's economic resilience to continue. The achievements made amidst difficult reforms have provided the government with the opportunity to take urgent steps to support the economy and protect vulnerable populations.

Commenting on this, Mr. Kenji Okamura, Deputy Managing Director and Acting Chief of the International Monetary Fund, stated that the rise in global oil prices could lead to increased inflation and adverse impacts on the external current account. Additionally, a decline in tourism earnings would also have a negative impact on the external current account. Although the program's progress has generally been good, further strong efforts are needed to complete reforms in public financial and investment management, as well as in the power sector. He also pointed out that it is essential to continue the government's revenue collection process to enhance economic growth by making the tax system more efficient.

Mr. Okamura also mentioned that although the country's debt restructuring process is nearing completion, the risk to debt sustainability remains high. Despite various challenges, Sri Lanka has succeeded in robustly advancing the Extended Credit Facility program, and the benefits derived from it have helped protect the economy's resilience and cope with the impacts of cyclones and the war in the Middle East. However, the ongoing war in the Middle East has had a significant adverse impact on the country's future economic trajectory, and due to the risks arising from it, Sri Lanka's economic growth is projected to slow to 3 percent in 2026. The severity of the conflicts and the uncertainty surrounding their duration further jeopardize the future economic outlook.

Mr. Okamura points out that in the face of economic shocks, it would be appropriate for the government's fiscal policy to be relaxed in 2026, and he emphasizes that monetary policy should prioritize safeguarding price stability. Enhancing exchange rate flexibility and gradually phasing out balance of payments measures will be crucial for rebuilding the external sector's buffers and resilience. Furthermore, he also highlights the need for systematically designed structural reforms and a modernized public infrastructure system to improve the country's investment environment and boost its economic growth potential.