Strengthen reforms, IMF tells SL ahead of fourth review

• Stresses need to strengthen tax compliance and eliminating exemptions
• Asserts the urgent need to restore cost-recovery electricity pricing
• Says going forward social support needs to be well targeted towards the most disadvantaged so as to promote inclusive growth with limited fiscal space
• Says staying committed to reforms remains Sri Lanka’s best path to economic sustainability
• Next IMF mission is expected to visit Sri Lanka in the coming weeks

The International Monetary Fund (IMF) will closely monitor Sri Lanka’s fiscal and structural reforms ahead of the fourth review, following the successful completion of the third review under the Extended Fund Facility (EFF) programme.

Last Friday, the IMF approved the third review, allowing Sri Lanka to draw US$ 334 million, bringing total disbursements under the programme to US$1.34 billion. However, the Fund has cautioned that further reforms are critical to sustaining economic recovery.

During a virtual press briefing yesterday, the IMF stressed the need to strengthen tax compliance and eliminating exemptions as essential to maintaining fiscal discipline.

To meet the 2025 tax revenue target of 13.9 percent of GDP, Sri Lanka must generate additional gross revenue gains of 1.6 percent of GDP. The IMF highlighted that these gains are necessary to counteract tax relief measures, the removal of the imputed rental income tax (IRIT), and lower-than-expected VAT compliance.

The Fund also warned of growing fiscal risks from State-owned enterprises, stressing the urgent need to restore cost-recovery electricity pricing.

“At the next tariff setting, it is important to ensure that tariffs are once again set to recover the cost,” asserted IMF Senior Mission Chief for Sri Lanka Peter Breuer.

Additionally, the IMF emphasised the importance of meeting social spending targets and continuing reforms to the social safety net to protect the most vulnerable.

“Going forward, social support needs to be well targeted towards the most disadvantaged so as to promote inclusive growth with limited fiscal space,” Breuer said.

A key focus of the fourth review will be ensuring that Sri Lanka’s final budget, set for passage this month, aligns with agreed fiscal parameters.

“This is something we will be watching very carefully,” he added.

Despite ongoing challenges, Breuer acknowledged Sri Lanka’s progress, noting that the country has already met “about half of the programme objectives,” which he described as “very impressive.”

Reflecting on the economic crisis of June 2022—marked by severe shortages of fuel, food, and medicine—he contrasted it with the present recovery, highlighting a 5.5 percent growth rate.

“Since then, in the short amount of time that the programme has been there, basically since 2023, it has already recovered 40 percent of the income it has lost in the preceding five years.

“In a short amount of time, Sri Lanka has already seen a very significant recovery – the most recent growth number was 5.5 percent. So I think things are turning around significantly in Sri Lanka. I am quite optimistic,” he said.

Breuer stressed that staying committed to reforms remains Sri Lanka’s best path to economic sustainability.
“This is the last budget where there is still a bit of an increase needed, 1.5 percent of GDP. But all the hard adjustment had already taken place in the previous two years,” he said.

The next IMF mission is expected to visit Sri Lanka in the coming weeks.