Global crises slam brakes on Sri Lanka’s recovery: IMF

By Mirror Business Desk

Colombo, May 29 (Daily Mirror) - Sri Lanka’s economic recovery is beginning to lose momentum under the weight of renewed global shocks, the International Monetary Fund (IMF) said, warning that the war in the Middle East, rising oil prices, and post-cyclone disruptions are slowing growth.

The three elements are reigniting inflationary risks and exposing unfinished reforms in the country’s fragile recovery path.

In a closely watched assessment released after approving the latest US$ 695 million tranche under Sri Lanka’s Extended Fund Facility (EFF), the IMF projected economic growth to slow sharply to 3 per cent in 2026 from 5 per cent in 2025. It went on to warn that higher oil prices and weaker tourism earnings are expected to worsen inflation and pressure the external sector.

“The latter, however, has significantly worsened Sri Lanka’s economic outlook and tilted risks to the downside. For 2026, growth is projected to slow down to 3 per cent. Higher oil prices would increase inflation and weaken the current account, which would also be adversely impacted by lower tourism receipts,” IMF Deputy Managing Director and Acting Chair Kenji Okamura said following the Executive Board’s completion of the combined Fifth and Sixth Reviews under the EFF programme.

Sri Lanka is already navigating rising fuel costs, electricity tariff pressures and tighter monetary conditions following the Central Bank’s recent rate hike aimed at containing inflation and stabilising the rupee amid escalating global energy prices.

The IMF said the uncertainty surrounding the intensity and duration of the Middle East conflict continues to heighten risks for Sri Lanka’s recovery, despite what it described as generally strong programme implementation by authorities.

“Sri Lanka’s strong implementation under the EFF arrangement has continued despite challenging circumstances. Gains from the economic reform programme helped preserve economic resilience and provided room to respond to cyclone Ditwah and the Middle East war,” Okamura said.

While the IMF acknowledged that prior actions linked to restoring fuel and electricity cost-recovery pricing had been met, it also pointed out concern over delays in key structural reforms, particularly in the electricity sector and broader public financial management.

“Programme performance remains generally strong, but efforts are required to complete public financial and investment management, and electricity sector reforms. Sustained revenue mobilisation is crucial to make the tax system more efficient and growth-enhancing and should be spearheaded by developing a medium-term revenue strategy,” the IMF said.

The IMF also disclosed that Sri Lanka had failed to observe continuous performance criteria related to avoiding new external payment arrears and refraining from imposing or intensifying import restrictions, although all end-December 2025 quantitative performance targets were met.

The latest review unlocks SDR 508 million, equivalent to around US$ 695 million, bringing Sri Lanka’s total IMF disbursements under the programme to about US$ 2.4 billion so far.

Despite downside risks, the IMF projected Sri Lanka’s gross official reserves to improve to US$ 8.6 billion by end-2026 from US$ 6.8 billion in 2025, while inflation is expected to average 5 per cent this year after remaining subdued in 2025. The IMF also indicated support for temporary fiscal easing in 2026 to accommodate relief measures linked to external shocks and reconstruction spending following Cyclone Ditwah, although authorities are expected to return to stricter fiscal targets from 2027 onward.