Cybercrime incident had direct bearing on EFF program - IMF Resident Representative

The fraud incident at NDB originated in employee misconduct but was not identified timely due to inadequate internal and external controls

U.S. –Iran MoU encouraging, but downside risks to the SL economic outlook remain   

Maintaining cost-recovery pricing of energy will remain a core requirement throughout the EFF program

International Monetary Fund (IMF) Resident Representative Martha Tesfaye Woldemichael responds to questions by Daily Mirror regarding the economy and the impact from the Middle East war.   

Q  What is your assessment of the impact of the Middle East war on Sri Lanka?

A: The war in the Middle East constitutes a major external shock for Sri Lanka. This is because the Middle East accounts for roughly half of Sri Lanka’s petroleum imports, around 40 percent of remittances, and serves as a transit hub for over a third of flights bringing tourists to the island. So, when the war broke out and the shock hit the Sri Lankan economy, the transmission channels were immediate: fuel prices went up, tourist arrivals dropped, and inflation rose.  

While the recent signing of the memorandum of understanding between Iran and the U.S. is an encouraging step, downside risks to the outlook remain. What is reassuring is that Sri Lanka is not facing this shock from the same fragile position it was in four years ago. The hard-won gains of the authorities’ reform program, including stronger fiscal and external positions, have given them room to respond quickly, notably through the rollout of a temporary, on-budget, relief package for fuel, electricity, fertilizer and the most vulnerable households. In other words, economic resilience built through reform pays dividends when shocks arise.   

Q The global shocks will make it difficult for Sri Lanka to meet the economic targets envisaged in the IMF program. What is the breathing space for Sri Lanka under the circumstances?

A: Sri Lanka’s reform program supported by the IMF’s Extended Fund Facility (EFF) is designed with built-in flexibility to accommodate shocks. We at the IMF are not asking Sri Lanka to maintain rigid targets when circumstances fundamentally change. For instance, under the just completed Fifth and Sixth Reviews, the IMF agreed with the authorities to relax the 2026 primary balance target from 2.3 percent of GDP to 1.4 percent of GDP, given recovery and reconstruction needs following Cyclone Ditwah. Similarly, we lowered the floor on net international reserves to reflect the slowdown in reserve accumulation due to the Middle East war.   

What is key is to respond to shocks without jeopardizing fiscal sustainability and the good progress made so far toward restoring debt sustainability. This is why it is very important for any fiscal support to be well-targeted, carefully costed, and timebound. For instance, the Middle East relief package is capped at Rs.100 billion and sunsets in September 2026. Importantly, from 2027, the authorities have committed to returning to the original 2.3 percent primary balance target given elevated vulnerabilities in a shock-prone environment. The breathing space exists, but it needs to be used wisely to safeguard hard-won reform gains.   

Q There are media reports about the government planning for non-essential import restrictions. What is the IMF view in this regard? Are import restrictions advisable given the dollar drain from vehicle imports, which has resulted in rupee weakening, despite being a boost to state revenue?

A: Motor vehicle imports did generate substantial tax revenue due to pent-up demand—2.8 percent of GDP in 2025—helping Sri Lanka achieve a primary surplus of 5.4 percent of GDP in 2025, well above the EFF program target. While the demand for motor vehicles is projected to dissipate through 2026, the authorities recently increased the customs duty on some motor vehicles from 30 to 45 percent in an effort to delay non-essential imports, reduce dollar demand, and safeguard foreign exchange reserves. However, this measure raises the total tax burden on imported vehicles and increases reliance on trade taxes. It also goes against the continuous commitment, under the EFF program, to refrain from imposing or intensifying import restrictions for balance-of-payment (BoP) reasons.  

While import restrictions could help mitigate BoP pressure in the near term, they should not be a substitute for reforms and macroeconomic adjustment. Our recommendation is to let the exchange rate play its role of shock-absorber.   

Q Compared with other countries that reached out to the IMF and struck deals, how do you see Sri Lanka’s progress?

A: We assessed Sri Lanka’s performance under the EFF as generally strong under the recently completed Fifth and Sixth Reviews. After all, the numbers speak for themselves. Growth rebounded to 5.0 percent in 2025 after a deep contraction in 2022; at 5.1 percent, the 2026Q1 outturn also exceeded expectations. Inflation, which peaked at almost 70 percent during the crisis, fell to 5.5 percent y/y in May 2026. Gross official reserves, which were depleted during the crisis, accumulated to US$6.9 billion at end-May. Tax revenue reached 15.4 percent of GDP in 2025, the highest level in a decade. The primary surplus substantially exceeded program targets. Debt restructuring is nearing completion, with public debt falling from 125.8 percent of GDP in 2022 to 101.1 percent in 2025.  

These are not minor accomplishments. Many countries struggle for years to stabilize inflation, rebuild reserves, and restore fiscal discipline. Sri Lanka has done all three within the span of the EFF program. Of course, challenges remain. One-fourth of the population still lives below the poverty line. Structural reforms require continued momentum. The task ahead is to move from stabilization to growth by pressing ahead on deep reforms in areas such as trade, labor markets, and the business climate to translate macroeconomic stability into lasting improvements in living standards for all Sri Lankans.

Q What is the IMF’s position on the delay in restructuring SriLankan Airlines and other state institutions?

A: There has been real progress: SriLankan Airlines completed the restructuring of its US$175 million international bond in March this year, on terms consistent with the EFF program parameters. The authorities are also implementing a medium-term strategic plan to restore operational viability. More recently, a committee was appointed to conduct a strategic review and restructuring of SriLankan Airlines. Accelerating the restructuring of the airline to strengthen its balance sheet and improve commercial performance would be key to minimizing fiscal risks to the Treasury.   

More generally, it is crucial that state-owned enterprises (SOEs) aremanaged prudently to avoid accumulating losses or debts that would eventually be paid by taxpayers. This is why we pay close attention to cost-recovery pricing of fuel and electricity under the EFF program. We also pay close attention to SOE borrowing and to transparency: we require that the 52 largest SOEs publish audited financial statements by end-June of the following year. In the same vein, a new SOE law is being developed to strengthen transparency, accountability, and governance.   

Q Given the current situation, how challenging will it be for Sri Lanka to boost reserves to the expected level ahead of the commencement of debt servicing?

A: Sri Lanka has come a long way from the depleted levels of 2022, with gross international reserves reaching US$6.9 billion at end-May 2026. The Middle East war has complicated this effort. Higher oil prices increase the import bill, and reduced tourism receipts weaken foreign exchange inflows. We acknowledge these challenges under the Fifth and Sixth Reviews, where we project a weaker BoP outlook and slower reserve accumulation. Concretely, this means we revised our gross international reserve projections down relative to the previous review. Importantly, we relaxed the program target on net international reserves to accommodate the external shock.   

What is key, going forward, is for the Central Bank (CBSL) to remain committed to rebuilding external buffers through outright foreign exchange purchases, while limiting sales to disorderly market conditions. Maintaining exchange rate flexibility is paramount to allow the market to clear without draining reserves. Additionally, observing fiscal discipline at all times, restoring debt sustainability, and implementing growth-enhancing reforms, will help safeguard hard-won gains.   

Q The IMF has reiterated that the next disbursement is heavily tied to maintaining strict cost-recovery pricing for electricity and fuel. Given the intense public anger over rising utility tariffs, is there any flexibility for targeted energy subsidies, or is an absolute market-driven pricing formula non-negotiable?

A: Restoring cost-recovery pricing for electricity and fuel was indeed a key condition for the completion of the Fifth and Sixth Reviews. Maintaining cost-recovery pricing of energy will remain a core requirement throughout the EFF program. Why is it essential? Because when the National State Operator and Ceylon Petroleum Corporation operate at a loss, those losses are ultimately borne by taxpayers—often through borrowing that adds to public debt. They become a burden, draining resources from the budget and crowding out spending on health, education, and productive investment.   

At the same time, cost-recovery pricing of energy is not incompatible with supporting the vulnerable. Under the EFF program, the authorities are committed to strengthening social safety nets and to observing the floor on social spending to ensure that low-income families are protected from the impact of crises and policy adjustments. As part of the relief package in response to the Middle East war, the authorities topped up Aswesuma cash transfer payments to cushion beneficiaries. They also extended fuel subsidies for small fisheries, fertilizer subsidies for small farms, and electricity subsidies for consumers of less than 180 units per month. Going forward, it is crucial to allow fuel price adjustments to pass through while, at the same time, shielding the most vulnerable through temporary, targeted, and on-budget support, without jeopardizing fiscal sustainability, undermining efforts to restore debt sustainability, or derailing the reform path.   

Q  The recent $2.5 million cyber theft from the newly established Public Debt Management Office (PDMO)—where a sovereign debt repayment to Australia was intercepted via systemic digital breaches—has exposed a severe vulnerability in Sri Lanka’s fiscal infrastructure. Given that the PDMO was created specifically under the IMF’s structural reform mandates, and amid disclosures that similar cyber attempts targeted payments to India, how does the IMF view this institutional failure?

A: The cybercrime incident had a direct bearing on Sri Lanka’s EFF program. The continuous performance criterion on preventing new external payment arrears was not observed due to the missing external debt payment to the Government of Australia. As a result, in order to receive the tranches under the Fifth and Sixth Reviews, the authorities requested a waiver of nonobservance on the basis of minor breach given the size of the missed payments (0.002 percent of GDP) and the adoption of corrective actions. These include clearing the arrears as soon as feasible, implementing standard operating procedures for the Public Debt Management Office (PDMO) by end-June, and operationalizing the new debt management information system by end-August to facilitate, inter alia, robust verification of account details and payment amounts.   

Together with other development partners, the IMF remains closely engaged to continue strengthening the PDMO’s capacity through technical assistance. There has been progress since its establishment, with the PDMO making strides on publishing its first Medium-Term Debt Strategy and Annual Borrowing Plan, and conducting weekly domestic bond auctions. Sustained capacity building is crucial to promote prudent debt management practices, deepen domestic debt markets, and support Sri Lanka’s return to international capital markets.   

Q How seriously has the IMF taken note of the fraud at the NDB?

A: The fraud incident at NDB originated in employee misconduct but was not identified timely due to inadequate internal and external controls. The CBSL responded promptly – suspending the bank’s cash dividend distribution and pledging system-wide liquidity support to prevent any spillover to confidence in the broader banking sector. A forensic audit into the incident has also been initiated.   

While CBSL’s assessment that NDB continues to meet all regulatory requirements relating to capital and liquidity is reassuring, it would be important to strengthen CBSL’s supervision of operational risks and AML/CFT compliance to safeguard financial integrity and stability.   

Q Sri Lanka’s poverty level will be affected further because of the crisis. How can Sri Lanka tackle this?

A: Poverty is on a downward trajectory, according to the latest World Bank estimates, having declined from 27.6 percent in 2023 to 22.1 percent last year. In the near term, strengthening social safety nets matters to protect the poor and vulnerable. In this regard, the Aswesuma cash transfer scheme is a cornerstone of the government’s strategy: coverage has expanded, with second-round beneficiaries being onboarded, while the social registry is being updated to improve targeting so that support reaches those who need it most. Aswesuma is a powerful tool to cushion vulnerable families from the impact of shocks. For instance, in response to Cyclone Ditwah, the authorities extended benefits for the vulnerable category by six months. To alleviate the negative impact from the Middle East war, they provided a cash top-up to recipients in April.   

But transfers alone will not lift a country out of poverty – growth and jobs will. This is why empowerment is key. Livelihood support through skills training and grants are helping Aswesuma beneficiaries stand on their feet. The authorities’ Prajashakthi initiative aims at empowering rural communities and eradicating poverty. While maintaining macroeconomic stability is a pre-requisite for bringing poverty rates down, sustaining the reform momentum is a necessity to build resilience and achieve strong, durable, and inclusive growth.