SRI LANKA’S NEXT IMF DECISION MUST BE ABOUT TRANSFORMATION, NOT ANOTHER RESCUE

BEYOND THE BAILOUT

Sri Lanka is once again approaching a consequential economic debate. As the present programme with the International Monetary Fund moves towards its concluding stages, the country will inevitably have to confront a difficult question: should Sri Lanka seek a further arrangement with the IMF? There will be strong views on both sides. Some will argue that continued IMF engagement is necessary to preserve discipline, maintain international confidence, rebuild reserves and provide an external anchor as Sri Lanka gradually returns to international capital markets and resumes significant debt servicing. Others will argue that, after years of painful adjustment, Sri Lanka must regain greater policy autonomy and avoid becoming permanently dependent on successive IMF programmes. Both arguments deserve serious consideration.   

The debate is no longer theoretical. The present four-year Extended Fund Facility, approved in March 2023, is moving towards its final stage. Following completion of the combined fifth and sixth reviews in May 2026, Sri Lanka has two programme reviews remaining. At the same time, debt service pressures will rise again as the post-restructuring repayment profile takes effect. The country therefore has to decide what kind of policy anchor, if any, it needs beyond the present arrangement. But I believe there is a danger that we may once again ask the wrong question. The real question is not simply: Should Sri Lanka go to the IMF again? The more important question is: What remains unfinished in Sri Lanka’s economic reconstruction, and what precisely should any further programme be designed to achieve? That distinction matters. An IMF programme is not a national economic strategy. It cannot substitute for political leadership. It cannot create entrepreneurial energy, national ambition, export competitiveness, technological capability or institutional discipline. It cannot decide what kind of economy Sri Lanka wishes to become. At its best, an IMF programme can provide financing, credibility, policy anchoring and international confidence. It can create a framework within which a country undertakes reforms that it should, in any event, undertake in its own national interest. Sri Lanka’s recurring difficulty has been that we have too often treated IMF programmes as bridges across crises rather than opportunities to permanently alter the conditions that repeatedly produce those crises. That is why the present debate must begin with an honest understanding of five questions. What brought Sri Lanka to the catastrophe of 2022? How bad was the situation we confronted? How was the fight back sequenced? What did we achieve, and what did we fail to complete?   

And, most importantly, what must come next?   

THE CRISIS DID NOT BEGIN IN 2022

Sri Lanka’s economic collapse was not caused by a single event, one government or one external shock. It was the cumulative outcome of structural weaknesses built over decades, compounded by serious policy errors and then accelerated by a succession of domestic and external shocks. For many years, Sri Lanka lived beyond its means. Government revenue remained chronically inadequate. Public expenditure commitments continued to grow. Loss-making state-owned enterprises imposed recurring burdens on the Treasury and the wider economy. The country imported far more than its export capacity could comfortably finance. External borrowing increasingly filled the gap. We borrowed without sufficiently expanding the productive capacity necessary to repay. Our export base remained narrow. Our tax base remained weak. Our public sector expanded. Our State enterprises accumulated losses. Our economy remained vulnerable to fluctuations in tourism, remittances, energy prices and global capital markets. Then came a series of shocks and policy failures. The Easter Sunday attacks damaged tourism. The sweeping tax reductions announced in late 2019 sharply weakened an already fragile revenue base. The COVID-19 pandemic devastated tourism and disrupted foreign exchange earnings. Sri Lanka lost access to international capital markets following sovereign downgrades. External debt obligations continued to mature. Yet the necessary adjustment was delayed. The exchange rate was defended beyond what the country’s reserves could sustainably support. Monetary financing expanded. Foreign exchange shortages intensified. The abrupt fertiliser policy damaged agricultural production and confidence. Remittance flows increasingly moved away from formal channels as distortions widened. Eventually, economic reality overwhelmed political preference. By early 2022, Sri Lanka was no longer confronting an ordinary balance-of-payments difficulty or a conventional recession. We were facing systemic economic disintegration.   

HOW BAD WAS IT?

It is important that we do not allow the passage of time to sanitise the reality of 2022. Foreign exchange liquidity had virtually disappeared from the formal system. Fuel vessels waited offshore while the country struggled to find dollars to pay for them. There were kilometre-long queues for petrol and diesel. Cooking gas became scarce. Power cuts extended for hours. Medicines and essential inputs became difficult to obtain. Businesses could not plan production. Parents did not know whether they could find fuel to take children to school. Workers spent days in queues. The currency depreciated sharply. Inflation accelerated at a frightening pace. Food inflation inflicted enormous hardship on the poorest. Confidence in the State’s ability to maintain basic economic normalcy began to collapse. On 12 April 2022, Sri Lanka announced an interim policy of suspending normal external debt servicing pending an orderly restructuring. The country was not merely poor. The country was becoming dysfunctional. That distinction is critical. When an economy enters such a condition, the sequencing of policy becomes decisive. One cannot begin with long-term growth strategies while the currency is collapsing, inflation is spiralling, reserves are disappearing, and essential supplies cannot be financed. The first responsibility is to stop the fall. This is why I have always viewed Sri Lanka’s recovery not as a single process of “stabilisation”, but as a three-stage economic reconstruction.   

PHASE ONE: APPLY THE BRAKES AND PREVENT FURTHER DEGRADATION

The first phase was about survival. The immediate objective was to prevent further degradation of the economy and arrest the free fall. We had to confront a brutal reality: Sri Lanka simply did not possess the foreign exchange required to sustain previous levels of imports and consumption. The economy, therefore, had to adjust to the resources actually available to it. This required extremely painful decisions. Demand had to be compressed.   

Imports had to be restricted and prioritised. Scarce foreign exchange had to be preserved for essential requirements. Monetary conditions had to tighten. Artificial price structures had to be corrected. The exchange rate could no longer be defended indefinitely at a level disconnected from market reality. Fuel and electricity pricing had to increasingly reflect actual cost. The fuel QR system was introduced because a scarce national resource had to be distributed more rationally, transparently and equitably. In a situation where unrestricted demand could not possibly be met, rationing through a digital mechanism was preferable to endless queues, black markets, arbitrary access and disorder. Cost-reflective pricing was equally painful. For years, Sri Lanka had often treated below-cost energy as though it were a free social benefit. It was not free. The losses were merely transferred elsewhere: to State banks, the Treasury, public debt, monetary expansion or future taxpayers. The first phase, therefore, involved what economists may describe as demand compression or demand destruction. Those are clinical terms. The human reality was far harsher. Families reduced consumption. Businesses postponed investment. Real incomes fell. Interest rates rose. The middle class came under intense pressure. The poor suffered disproportionately. But there was no painless route out of an economy that had run out of foreign exchange. The choice was not between pain and an easy alternative. The choice was between an organised adjustment and a disorderly collapse. Phase One was therefore about applying the brakes before the vehicle went over the precipice.   

PHASE TWO: STABILISATION, REVENUE RECOVERY AND FISCAL CONSOLIDATION

Stopping the fall was not enough. Once the immediate degradation was arrested, Sri Lanka had to begin rebuilding the foundations of macroeconomic credibility. This was the second phase.   

These phases were not separated by neat dates. In a crisis, measures necessarily overlapped. Exchange rate adjustment, monetary tightening, revenue measures, negotiations with creditors and engagement with the IMF proceeded at different speeds and often at the same time. The three-phase framework is therefore a way of understanding the dominant objective at each stage, not an artificial claim that one phase ended completely before the next began.   

A State that cannot raise adequate revenue cannot remain stable. A government that persistently finances recurrent expenditure through borrowing eventually runs out of willing lenders. A country that monetises fiscal deficits eventually pays through inflation and currency depreciation. An economy that suppresses energy prices without addressing the underlying cost eventually transfers the burden into debt. Sri Lanka therefore had to confront a fundamental contradiction. We had developed expenditure expectations associated with a much richer State while maintaining the revenue capacity of a much poorer one. That could not continue. Revenue had to be rebuilt. VAT had to be increased. The VAT base had to be widened. Personal income taxation had to be restored and strengthened. Taxation of employment income returned through the Advance Personal Income Tax framework. Corporate and personal income tax structures had to be revisited. Exemptions and thresholds had to be reconsidered. The tax net had to expand. Compliance had to improve. Administration had to become more effective. These measures imposed enormous burdens, particularly on professionals, salaried employees, businesses and the middle class. That hardship should never be dismissed. But the alternative was to continue a fiscal model that had already collapsed. At the same time, fiscal consolidation became unavoidable. The primary balance had to improve. Expenditure discipline had to strengthen. Monetary financing had to be constrained. Public financial management had to become more credible. Cost-reflective energy pricing had to be embedded. The exchange rate had to move towards a market-determined framework. Foreign reserves had to be rebuilt. Inflation had to be brought under control.   

And debt restructuring had to proceed. This was among the most complex aspects of the entire recovery. Sri Lanka’s debt had become unsustainable. No credible path forward existed without restructuring obligations across different creditor classes with different legal rights, strategic interests and financial expectations. Official bilateral creditors had to be engaged. Commercial creditors had to be negotiated with. Domestic debt vulnerabilities had to be addressed without destabilising the banking and financial system. A staff-level agreement with the IMF was reached in September 2022, and the present four-year Extended Fund Facility was approved by the IMF Executive Board on 20 March 2023. Financing assurances had to be obtained. Relations with multilateral partners had to be restored. This was not one policy decision. It was an interconnected reconstruction of fiscal, monetary, external and debt credibility. And substantial progress was achieved. The queues gradually disappeared. Essential supplies returned. Inflation fell dramatically from crisis levels. The exchange rate stabilised. Foreign reserves improved. Tourism and remittances recovered. After two years of contraction, growth returned in 2024 and strengthened thereafter. Revenue performance strengthened. Debt restructuring advanced. International confidence began, gradually, to return. Sri Lanka had moved away from the precipice. But this is precisely where countries often make their next great mistake. They confuse stabilisation with transformation.   

STABILITY IS NOT PROSPERITY

An economy can become stable at a low level of activity. A country can balance its books while its most talented young people leave. A government can increase revenue while private investment remains weak.   

A central bank can control inflation while productivity stagnates. A nation can repeatedly pass IMF reviews without becoming internationally competitive. That is why Phase Three is the most important stage of all.   

PHASE THREE: GROWTH, PRODUCTIVITY AND STRUCTURAL TRANSFORMATION

Phase One was about survival. Phase Two was about stability. Phase Three must be about transformation. Sri Lanka cannot tax itself into prosperity. It cannot austerity its way into competitiveness. It cannot permanently suppress demand and call that development. It cannot rely indefinitely on tourism, remittances and external borrowing to compensate for a weak productive base. And it cannot measure national success by the number of IMF reviews completed. The ultimate test is whether Sri Lanka can produce more, export more, attract more investment, innovate more, create better jobs and steadily increase real incomes. That requires structural reform. And here we must be candid. This is the area in which Sri Lanka’s transformation remains incomplete.   

WHAT DID WE MISS?

We did not go far enough on state-owned enterprise reform. For decades, Sri Lanka has known that several State enterprises are commercially inefficient, fiscally dangerous and vulnerable to political interference. Yet meaningful reform has repeatedly been postponed. The question should never be reduced to a simplistic ideological contest between “privatisation” and “State ownership”. The proper question is far more disciplined. What must the State own? Why must it own it? What public purpose is served by that ownership? What should be professionally managed? What should face competition? What should be restructured?   

Where should private capital and expertise be brought in? And what should the State simply cease to own? We also failed to undertake serious land reform. Sri Lanka possesses valuable land that remains underutilised, fragmented among State institutions, trapped in unclear title arrangements or immobilised by administrative processes. A country seeking investment cannot treat access to productive land as an afterthought. We did not sufficiently reform labour markets. This does not mean abandoning worker protection. A civilised economy must protect dignity, safety, fair compensation and social security. But a modern labour framework must also allow enterprises to hire, expand, reorganise and respond to technological change. Protecting existing jobs at the cost of preventing future jobs is not social justice. Trade reform also remains incomplete. Sri Lanka cannot become export-oriented while maintaining structures that reward inward-looking inefficiency. Public-sector productivity remains a major challenge. Investment approvals remain too slow. Regulatory overlap remains excessive. Policy unpredictability remains costly. Tax administration remains weaker than it should be. Education remains insufficiently aligned with the demands of a digital, technological and globally competitive economy. We have known most of these problems for years. Our failure has not primarily been one of diagnosis. It has been one of political execution.   

WHY ARE STRUCTURAL REFORMS SO OFTEN POSTPONED?

Because structural reform is politically different from macroeconomic adjustment. A central bank can raise interest rates. A government can increase VAT. An exchange rate can adjust. An import restriction can be imposed. These decisions are painful, but they can be implemented relatively quickly. Structural reform is different because it confronts organised interests.   

Reforming a State enterprise affects employees, trade unions, management structures, procurement networks, political patronage and entrenched beneficiaries. Land reform challenges bureaucratic control and institutional fiefdoms. Labour reform creates immediate fears about job security. Trade liberalisation exposes protected industries to competition. Public-sector reform confronts decades of political recruitment and administrative inertia. The benefits of reform are often dispersed and take time to become visible. The opponents are concentrated, organised and present today. That is the political economy of structural reform. It also explains why so many countries complete the first stage of adjustment and then retreat when the immediate crisis passes. The fire is extinguished. The urgency disappears. Politics returns to normal. And the structural weaknesses that caused the crisis begin quietly rebuilding. Sri Lanka cannot afford that cycle again.  

WHAT CAN WE LEARN FROM OTHER COUNTRIES?

No foreign country offers a template that Sri Lanka can simply copy. History, institutions, political culture and economic structure differ. But comparative experience offers powerful lessons. 

 

JAMAICA: DOMESTIC OWNERSHIP MATTERS MORE THAN EXTERNAL PRESSURE

Jamaica is perhaps one of the most relevant examples for Sri Lanka. It confronted extremely high public debt and years of weak growth. Yet its eventual success did not arise merely because the IMF imposed conditions. The deeper achievement was the creation of domestic ownership around fiscal reform. Political actors, the private sector, trade unions and civil society developed mechanisms for monitoring commitments and sustaining credibility. Fiscal rules were strengthened. Independent oversight mattered. Reform continuity survived political change. The lesson for Sri Lanka is profound. A reform programme becomes durable when citizens begin to see it not as an IMF programme imposed from Washington, but as a national programme owned at home. Sri Lanka must therefore move from external conditionality to domestic consensus.   

SOUTH KOREA: USE CRISIS TO RESTRUCTURE, NOT MERELY TO REFINANCE

South Korea’s experience following the 1997 Asian financial crisis offers another lesson.   

The country did not treat emergency financing as the end of the process. It undertook deep financial-sector restructuring. Weak institutions were addressed. Corporate balance sheets were restructured. Governance practices were challenged. The relationship between highly leveraged corporations and the financial system was confronted. The lesson is not that every Korean policy should be copied. The lesson is that a crisis can be used to address structural weaknesses that are politically impossible to confront in normal times. Sri Lanka used the 2022 crisis to undertake major fiscal and monetary adjustments. The question is whether we used it sufficiently to restructure the economy itself.   

IRELAND: FISCAL ADJUSTMENT ALONE DOES NOT CREATE RECOVERY

Ireland’s experience demonstrates the importance of productive capacity. Its recovery from a devastating banking and sovereign crisis was not simply the consequence of expenditure cuts or tax measures. Ireland possessed an economy deeply connected to global markets, a strong export base, substantial foreign investment, human capital and institutional credibility. The lesson for Sri Lanka is straightforward. Fiscal adjustment can restore stability. Only productive capacity can sustain prosperity. Sri Lanka must therefore ask not merely how to reduce deficits, but how to become a location from which firms can efficiently produce goods and services for the world.   

PORTUGAL: ADJUSTMENT MUST BECOME A BRIDGE TO INVESTMENT AND PRODUCTIVITY

Portugal offers a more nuanced lesson. Its experience reminds us that fiscal adjustment, by itself, does not automatically resolve deep productivity constraints. Long-term success requires improvements in investment, skills, competition, institutional quality and productive efficiency. The lesson for Sri Lanka is that an adjustment programme must have an exit strategy. That exit strategy is growth.   

SHOULD SRI LANKA SEEK ANOTHER IMF PROGRAMME?

The answer should not be ideological. Sri Lanka should not seek another programme merely because remaining under IMF supervision feels safer.   

Nor should it reject another programme merely to make a political declaration of sovereignty. Economic sovereignty is not achieved by refusing external assistance while remaining financially vulnerable. Real sovereignty comes from possessing the productive capacity, reserves, fiscal strength and market credibility to make choices. The decision should therefore be based on a hard assessment of: our external financing requirements; reserve adequacy; future debt-service obligations; access to international capital markets; the cost of such access; exposure to energy shocks; geopolitical risk; export vulnerability; and the credibility of domestic reform institutions. Sri Lanka remains a small, open and vulnerable to external shocks economy. A war in the Middle East can raise our energy bill. A slowdown in major economies can weaken exports. A global risk-off event can affect capital flows. Trade restrictions can damage key industries. Tourism can be disrupted by events entirely beyond our control. Debt repayments will again become increasingly significant. Foreign exchange buffers remain essential. Therefore, if a successor IMF arrangement can provide a useful external anchor, strengthen confidence, support reserve accumulation, facilitate market re-entry and preserve reform continuity during a vulnerable transition, there may be a compelling case to consider it. But if Sri Lanka enters another programme, it should not be a repetition of the present one. The present programme was born out of collapse. The next, if there is one, must be designed for transformation.

 

WHAT SHOULD A FUTURE PROGRAMME PRIORITISE?

First, growth must move to the centre of economic policy. Not artificial growth manufactured by unsustainable public borrowing.   

Not consumption booms financed by imported capital. But productivity-driven, export-oriented, private investment-led growth. Second, SOE reform must become real. Enterprise by enterprise, Sri Lanka must decide what the State should own, what it should regulate, what it should expose to competition, what it should restructure, where private capital should participate and what it should divest. The objective is not ideology. The objective is to stop using scarce public resources to preserve commercial inefficiency. Third, Sri Lanka needs a serious national land reform strategy. We need a transparent inventory of State land, digitised records, clearer title, faster approvals and mechanisms to bring underutilised assets into productive use while preserving environmental and social safeguards. Fourth, labour reform must combine flexibility with security. Sri Lanka should explore a modern social compact in which enterprises gain greater capacity to adapt, and workers receive stronger unemployment protection, retraining opportunities, portable benefits and fair compensation. The false choice between rigid labour markets and unprotected workers must be rejected. Fifth, Sri Lanka needs an export revolution. A country of our size cannot become prosperous by looking principally inward. We must deepen integration into global and regional value chains. We must expand service exports. We must strengthen logistics. We must exploit our geographic position. We must modernise agriculture. We must move into higher-value manufacturing. We must strengthen technology, IT and digitally delivered services. We must negotiate trade access strategically and help domestic firms become globally competitive. Sixth, tax reform must enter a new stage. The first stage necessarily focused on raising revenue quickly. The next must focus more intensely on broadening the base, reducing evasion, integrating data systems, digitising administration and improving predictability. The compliant taxpayer cannot permanently remain the easiest taxpayer to tax. Seventh, investment approvals must be radically simplified. An investor should not have to negotiate with the Sri Lankan State as though navigating a maze.   

Multiple agencies, overlapping approvals, uncertain timelines and policy reversals impose an invisible tax on investment. Time is a cost. Uncertainty is a cost. Administrative discretion is a cost. Eighth, education and skills reform must be recognised as core economic reform. Sri Lanka’s greatest long-term asset is its people. But human capital cannot remain globally competitive if curricula, universities, vocational systems and digital capabilities fail to evolve. Ninth, governance reform must continue. Transparent procurement, digital government, credible anti-corruption systems, predictable regulation and institutional independence are not peripheral concerns. They affect the cost of capital. They affect investment. They affect trust. Finally, Sri Lanka must build guardrails against another 2022. Fiscal rules must be credible. Debt management must be transparent. Monetary institutions must remain strong. Parliamentary scrutiny must improve. Contingent liabilities must be visible. SOE risks must be disclosed. No future government should find it easy to purchase short-term popularity by silently rebuilding long- term catastrophe.   

WHY IS THE PRESENT GOVERNMENT BETTER PLACED THAN MOST TO COMPLETE PHASE THREE?

This is perhaps the most important political question. The present Government possesses advantages that many previous administrations did not. It has a powerful electoral mandate. It has an overwhelming parliamentary majority. It came to office promising a break with established political practices. It carries less direct political responsibility for the decisions that culminated in the 2022 collapse.   

And it has an unusual degree of public legitimacy to undertake reforms in the name of fairness, accountability and national renewal. That matters enormously. Some reforms, if attempted by previous governments, would immediately have been attacked as elite- driven, externally imposed or designed to benefit vested interests. The present Government may be better placed to overcome that suspicion. A political movement historically associated with labour can potentially undertake labour reform with greater credibility, provided workers are genuinely protected. A government elected on a platform of social justice may be better placed to restructure subsidies while strengthening targeted protection for the poor. A government with a strong anti-corruption mandate may be better placed to confront procurement networks and politically connected monopolies. A government with an overwhelming parliamentary majority has the legislative capacity to reform outdated laws. A government that promised systemic change has the political vocabulary to explain why structural reform is not capitulation, but national renewal. This creates a rare opportunity. Perhaps one of the greatest opportunities Sri Lanka has had in decades. But political capital is a wasting asset. Every government begins with its greatest freedom at the start of its mandate. Over time, expectations rise. Interest groups reorganise. Reform fatigue develops. Local and national elections approach. The temptation to postpone pain and distribute benefits increases. That is why the window is now. The present Government should not see structural reform as the inheritance of a previous administration or the demand of the IMF. It should claim reform as its own. Improve it. Humanise it. Correct what is unfair. Protect the vulnerable. But complete it.   

THE REAL CHOICE BEFORE SRI LANKA

The debate over another IMF programme must not descend into the familiar contest between those who believe the IMF is the answer to everything and those who believe it is the cause of everything. Neither position is serious. The IMF did not create Sri Lanka’s decades of weak revenue. It did not create our inefficient State enterprises. It did not create our narrow export base. It did not create underutilised State land. It did not create politicised institutions. It did not create our resistance to competition. It did not create repeated policy reversals. And it cannot solve these problems for us. That responsibility belongs to Sri Lanka. We must also recognise another uncomfortable truth. Sri Lanka has had repeated engagements with the IMF over many decades. If, after every programme, we return to the same structural weaknesses, then the failure cannot indefinitely be attributed to the institution from which we repeatedly seek assistance. At some point, a nation must ask whether it has used external support to transform itself or merely to postpone the next reckoning. That is the question before us now. Phase One applied the brakes and stopped the free fall. Phase Two restored a measure of stability, rebuilt revenue, advanced fiscal consolidation, restructured debt and began restoring credibility. Phase Three must now release the productive capacity of the country. If another IMF programme is necessary, let it not be another rescue operation. Let it be a time-bound bridge from stabilisation to transformation. Let its priorities be growth, productivity, exports, investment, SOE reform, land reform, labour modernisation, trade integration, human capital and institutional resilience. And let us define success differently. Success is not completing another IMF review. Success is not receiving another tranche. Success is not merely maintaining enough reserves to survive the next quarter. Success is building an economy capable of creating opportunity for its people, competing with the world, protecting the vulnerable and withstanding the next external shock without collapsing.   

The ultimate objective of any future IMF programme should therefore be paradoxically simple: to help Sri Lanka build an economy strong enough not to need another rescue.