By The Pulseline News Desk
International Monetary Fund (IMF) Executive Board approval of Sri Lanka’s latest programme review will hinge on two key conditions — the Government presenting a 2027 Budget consistent with programme parameters and the completion of a financing assurances review confirming creditor support and progress in debt restructuring.
The conditions were set out by the Fund after IMF staff and the Sri Lankan authorities reached a staff-level agreement on the Seventh Review under the four-year Extended Fund Facility (EFF) and concluded the 2026 Article IV Consultation.
The IMF Executive Board must approve the staff-level agreement before Sri Lanka can access SDR 254 million, or about US$345 million, under the programme.
Once approved, the latest disbursement would take total IMF financial support under the current EFF arrangement to SDR 2.032 billion, or about US$2.7 billion, out of the total SDR 2.3 billion arrangement approved in March 2023.
The first condition requires Finance Minister President Anura Kumara Dissanayake to present the 2027 Budget to Parliament in line with the IMF programme parameters.
The second is the completion of the financing assurances review, through which the Fund will confirm multilateral partners’ financing contributions and assess whether Sri Lanka has made adequate progress with its debt restructuring.
The IMF’s position comes as the Government prepares to present the 2027 Budget, with fiscal policy remaining central to maintaining the gains made under the Fund-backed programme.
Calls for targeted subsidies amid Middle East war
At the same time, the IMF has cautioned the Government against broad or open-ended subsidies as Sri Lanka faces renewed external shocks, particularly from the prolonged conflict in the Middle East and its impact on global energy prices.
The Fund has specifically called on the Government to allow domestic fuel prices to adjust in line with international fuel prices and preserve cost-recovery energy pricing, while protecting vulnerable households.
Any Government support, the IMF said, should be well-targeted, included in the budget, carefully costed and time-bound to prevent subsidies from undermining fiscal and debt sustainability or reversing the economic recovery.
The Fund recommended using poverty-targeted cash transfers to shield vulnerable groups rather than relying on broad-based subsidies.
The warning comes amid the Government’s recent decision to provide substantial support to the fuel sector to cushion the impact of surging international oil prices, including a Rs. 41 billion subsidy for diesel during October-December.
The IMF also stressed that Sri Lanka should strengthen the coverage, targeting and responsiveness of its social safety nets so that future shocks can be addressed without compromising fiscal stability.
If the Middle East conflict generates stronger second-round inflationary pressures, the Fund said monetary policy should also be ready to tighten to prevent inflation expectations from becoming unanchored.
IMF sees continued economic resilience
Despite the risks, the IMF said Sri Lanka’s economy has remained resilient, with economic activity expanding by 4.2% in the second quarter of 2026, marking the eleventh consecutive quarter of strong growth.
Headline inflation stood at 8% year-on-year in September, while gross official reserves had risen to US$6.9 billion by end-August.
The Fund also noted that banks remained well capitalised and profitable, the fiscal outturn during the first half of 2026 was strong, and debt restructuring was largely completed.
However, the IMF warned that Sri Lanka remains exposed to downside risks from the duration and intensity of the Middle East conflict, global trade policy changes and the effects of El Niño.
It called for continued prudent policies and reforms to safeguard the gains made under the programme.
Among the longer-term priorities identified by the Fund are developing a medium-term revenue strategy, improving public investment management, maintaining greater exchange-rate flexibility and preserving the integrity of the anti-corruption legislative framework.
The IMF also called for reforms aimed at liberalising trade, modernising business and labour regulations, expanding access to finance, advancing digital public infrastructure and addressing infrastructure gaps to support stronger and more inclusive growth.
Leave a comment