ASIATODAY.ID, COLOMBO — International Monetary Fund warned on Tuesday that the escalating conflict in the Middle East is posing fresh risks to Sri Lanka’s economic recovery, urging authorities to maintain the momentum of reforms that have stabilized the crisis-hit economy and strengthened its resilience against external shocks.
The warning came after an IMF staff mission visited Colombo from June 24 to 30 to assess recent macroeconomic developments and the implementation of Sri Lanka’s reform program under the IMF-backed Extended Fund Facility (EFF).
According to the Fund, Sri Lanka’s swift policy response—including tighter monetary policy and temporary fiscal support—helped preserve macroeconomic and social stability despite mounting pressures from higher energy prices and global uncertainty triggered by the Middle East conflict.
Headline inflation accelerated from 1.6% in February to 5.5% in May 2026, largely due to rising energy costs. Tourist arrivals also slowed, while the pace of international reserve accumulation weakened, highlighting the country’s continued exposure to external shocks.
Despite the deteriorating global environment, the IMF said Sri Lanka’s economic reform program has provided valuable policy space to respond to the latest crisis. It stressed, however, that sustained reforms remain essential to safeguarding fiscal sustainability, restoring investor confidence, and ensuring durable economic growth.
The Fund called on the government to return to its targeted primary fiscal surplus of 2.3% of GDP in 2027, strengthen tax compliance, broaden the tax base, improve public financial management, accelerate reforms of state-owned enterprises, and maintain cost-reflective energy pricing while expanding targeted assistance for vulnerable households.
The IMF also noted that Sri Lanka’s sovereign debt restructuring is nearing completion but urged authorities to strengthen the capacity of the Public Debt Management Office to improve debt sustainability, deepen domestic capital markets, and facilitate the country’s eventual return to international financial markets.
On monetary policy, the Fund said the Central Bank of Sri Lanka should remain prudent, agile, and data-driven, while allowing exchange rate flexibility to absorb external shocks and limiting foreign exchange intervention to periods of excessive market volatility.
It also emphasized the need to strengthen cybersecurity, operational risk management, and anti-money laundering safeguards to preserve financial stability.
Beyond short-term stabilization, the IMF said Sri Lanka must press ahead with governance reforms, trade liberalization, labor market modernization, and measures to improve the investment climate in order to attract capital, create jobs, reduce poverty, and build a more resilient economy.
The country’s performance under the IMF-supported EFF program will be formally evaluated during the Seventh Review, scheduled for later this year.
The Fund said continued implementation of the reform agenda will be critical as Sri Lanka navigates an increasingly uncertain global economic landscape. (AT Network)
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