Beyond IMF dependence

Sri Lanka’s economic recovery, once hailed as a remarkable turnaround after the unprecedented crisis of 2022, appears to be entering a challenging phase again. The latest assessment by the International Monetary Fund indicates that economic growth is expected to slow to around three percent this year. While growth remains positive, the warning is significant because it signals that the easy gains from stabilisation have largely been exhausted.
The IMF has also reiterated another key message: Sri Lanka must broaden its tax base and improve revenue collection. That is needed to sustain economic stability and eventually graduate from dependence on external financial assistance. This recommendation is unlikely to be popular. Taxation remains a politically sensitive subject, particularly at a time when households and businesses continue to struggle with the high cost of living. Yet, the reality is that broadening the tax base is not merely an IMF demand. It is an economic necessity for a country that has repeatedly suffered from fiscal indiscipline and chronic revenue shortages.
Sri Lanka’s economic collapse did not occur overnight. It was the culmination of years of unsustainable borrowing, weak public finances, tax concessions granted without proper assessment of their long-term impact, and an inability to generate sufficient government revenue. For decades, successive governments spent more than they earned, filling the gap through borrowing. Eventually, the debt burden became unbearable.
The IMF programme sought to address this structural weakness. Tax increases introduced over the past few years helped improve government revenue considerably. However, the challenge now is not simply maintaining higher tax rates. It is expanding the number of people and businesses contributing fairly to the national revenue pool.
A narrow tax base places an excessive burden on a limited segment of taxpayers. Salaried professionals and formally registered businesses often find themselves carrying a disproportionate share of the tax burden, while large sections of economic activity remain outside the tax net. Such a system is neither equitable nor sustainable.
Broadening the tax base means ensuring that all eligible income earners and businesses contribute according to their capacity. It also means improving tax administration, reducing evasion, digitising collection systems, and identifying sectors that have traditionally escaped taxation. If implemented properly, a broader tax base could eventually create room for lower tax rates while maintaining adequate government revenue.
At the same time, policymakers must recognise that taxation alone cannot generate prosperity. Economic growth remains the ultimate solution. A growing economy creates jobs, raises incomes, attracts investment, and generates government revenue naturally. The IMF’s forecast of slower growth therefore deserves careful attention.
The country has reached a stage where stabilisation must give way to expansion. Investors require policy consistency. Export industries need greater support. Tourism must continue its recovery. Foreign direct investment remains far below potential levels. Bureaucratic obstacles, regulatory uncertainty, and delays in implementing reforms continue to discourage investors.
Sri Lanka cannot tax its way to prosperity. It must grow its way to prosperity while maintaining fiscal discipline. Revenue reforms and growth-oriented policies should therefore proceed hand in hand. The broader question concerns the country’s future relationship with the IMF. No nation wishes to remain under an IMF programme indefinitely. Such programmes are designed as temporary mechanisms to restore stability, not permanent economic management frameworks.
Sri Lanka’s objective should be to successfully complete the current programme and emerge stronger, more resilient, and capable of managing its own affairs without external supervision. However, exiting an IMF programme should not mean abandoning the reforms that helped restore stability. That would amount to repeating the mistakes of the past.
Sri Lanka’s ultimate goal should be economic sovereignty built on sound fundamentals. That means reaching a point where the country no longer requires IMF assistance because it has developed the discipline and institutional strength to manage its finances independently.
The IMF has provided the breathing space needed to avert disaster. The challenge now is to use that opportunity wisely. The country should certainly aspire to come out of the IMF programme. But it should do so only after ensuring that the habits which led to economic collapse are firmly consigned to history.