Sri Lanka’s IMF reserve target comes under pressure: KPMG

• Says mounting external pressures could keep SL’s gross official reserves below the IMF’s revised end-2026 target of US$8.6 billion despite the economy continuing to recover
• Points out lower global oil prices, tighter domestic monetary conditions and moderating import demand could ease pressure on the external account in the coming months
• Warns that renewed geopolitical tensions in the Middle East and continued import growth remain key risks to reserve accumulation

Sri Lanka’s efforts to rebuild its foreign exchange reserves are coming under renewed pressure as a surge in fuel and vehicle imports drives the external account back into deficit, potentially complicating the country’s path towards meeting the International Monetary Fund’s reserve targets, according to a new report by KPMG.

The professional services firm’s latest macroeconomic outlook said mounting external pressures could keep Sri Lanka’s gross official reserves below the IMF’s revised end-2026 target of US$8.6 billion despite the economy continuing to recover. Gross official reserves stood at US$6.45 billion at the end of June.

Sri Lanka’s post-crisis recovery gained momentum, with the economy expanding 5.1 percent in the first quarter, private sector credit accelerating and construction activity strengthening. However, the recovery is also fuelling import demand. The country’s current account returned to a deficit of US$97 million during the first five months of 2026, driven largely by higher fuel and vehicle imports and slower growth in tourism earnings.

Fuel and vehicle imports rose to US$1.8 billion during the first quarter, up from US$1.2 billion a year earlier, while the fuel import bill increased 21.3 percent year-on-year.

The increase follows the relaxation of vehicle import restrictions and a broader recovery in domestic demand after the country’s economic crisis.

The report noted that vehicle-related taxes accounted for nearly one-fifth of total tax revenue during the first quarter, helping support a stronger fiscal performance even as the imports added pressure on the balance of payments. Tourism, another major source of foreign exchange, provided less support than expected.

Tourism earnings fell 11.9 percent year-on-year to US$1.36 billion during January to May, even though tourist arrivals declined only 1.8 percent during the first six months of the year to 1.15 million visitors.

KPMG attributed part of the decline to lower estimated spending per tourist following revisions by the Sri Lanka Tourism Development Authority (SLTDA).

Workers’ remittances remained the strongest source of external support, rising 26.5 percent year-on-year to US$2.3 billion during the first quarter and helping offset some of the pressure from rising imports.

The report said lower global oil prices, tighter domestic monetary conditions and moderating import demand could ease pressure on the external account in the coming months.

However, it warned that renewed geopolitical tensions in the Middle East and continued import growth remain key risks to reserve accumulation.

The IMF earlier revised its end-2026 reserve projection to US$ 8.6 billion, but KPMG said achieving that target may become increasingly challenging if external pressures persist.

Sri Lanka’s reserve position has become one of the most closely watched indicators under the IMF-supported reform programme, with reserve accumulation viewed as critical to strengthening the country’s external buffers and maintaining confidence in the recovery.