IMF path risks squeezing dollar earners, economist warns

Sri Lanka’s macroeconomic adjustment under the International Monetary Fund (IMF) programme risks weakening the country’s dollar-generating sectors, even as it meets the key targets, a senior economist said, highlighting the emerging strains in credit, fiscal space and private sector balance sheets.

Dr. Kenneth De Zilwa, also a business cycle analyst, said in a commentary that the system-wide credit demand has risen, due to the cost-push shocks, requiring the monetary authorities to inject liquidity to sustain the credit transmission.

“A zero-expansion stance is therefore not neutral; it is contractionary by design.”

He noted that as the fiscal surpluses erode, the government’s dependence on the domestic banking system increases. However, the IMF-linked constraints limit the ability of the state banks to recycle liquidity toward the government-linked entities, creating a funding gap within the public sector. Inflation targeting in a cost-push environment transmits a “triple shock” to the real economy.

“The rising input costs, constrained liquidity and declining income streams converge to weaken the private sector balance sheets and undermine the debt sustainability at micro level,” he said.

Dr. De Zilwa said the combined effect of the restricted monetary expansion, tighter fiscal conditions and full cost pass-through requirements risks trapping Sri Lanka in a rupee-based adjustment cycle.

“While the country may meet the IMF targets on paper, it does so by compressing the very sectors that generate the dollars needed to sustain those targets,” he said.

He warned that such dynamics could undermine the external earnings capacity over time and pose deeper structural risks to the economy, if not addressed.