By Madhusha Thavapalakumar
Sri Lanka’s economic stabilisation under the International Monetary Fund (IMF)-supported Extended Fund Facility (EFF) has delivered tangible macroeconomic improvements, including sharply lower inflation, stronger revenue performance, and a recovery in output from crisis lows.
However, remarks made last week by senior IMF officials suggest that while the stabilisation phase is largely on track, the country’s medium-term growth trajectory remains uncertain and subject to considerable structural and external constraints.
The assessment emerged during a press briefing that combined the IMF’s Asia-Pacific regional outlook with an update on Sri Lanka’s programme following Cyclone Ditwah.
The briefing featured remarks by IMF Asia and Pacific Department Director Krishna Srinivasan, who outlined regional trends and risks, and IMF Mission Chief for Sri Lanka Evan Papageorgiou, who addressed programme performance, debt sustainability, and the treatment of the cyclone’s economic impact within the IMF framework.
Macroeconomic stabilisation shows measurable progress
Srinivasan outlined the core pillars of Sri Lanka’s IMF-supported programme, describing a framework built on revenue-based fiscal consolidation, institutional fiscal reforms, strengthened social safety nets, restoration of debt sustainability, rebuilding of external buffers, financial sector stability, and governance reforms.
On key macroeconomic indicators, he noted that Sri Lanka had recorded a growth rate of around 5% following the trough of the crisis.
Tax revenue, which fell to approximately 7.3% of Gross Domestic Product (GDP) at the height of the downturn, has risen to about 14.8% of GDP, driven by policy measures to broaden the tax base and improve compliance. Inflation, which peaked near 70% during the crisis, has declined to the low single digits and is expected to move towards the Central Bank’s medium-term target of 5%.
These outcomes indicated the efforts undertaken by the authorities and the population to restore stability, Srinivasan said, adding that the programme had succeeded in stabilising prices, rebuilding buffers, and anchoring fiscal performance.
He also stated that the fiscal framework included a minimum floor on social safety net spending, meaning that while fiscal consolidation is pursued, a baseline level of social expenditure must be maintained.
Introduces uncertainty without altering prog. Structure
Papageorgiou addressed questions surrounding the economic impact of Cyclone Ditwah and its implications for the IMF programme. He confirmed that the fundamental structure of the EFF remained unchanged, while acknowledging that the shock had introduced additional uncertainties that would need to be reflected in updated macroeconomic assessments.
“The core architecture of the programme remains in place,” he said, noting that performance prior to the cyclone had been strong. However, he added that some quantitative parameters, including performance criteria, may need to be revisited once the economic impact of the cyclone is fully assessed.
He explained that the IMF’s approach in such cases was to incorporate shocks into the macroeconomic framework rather than redesign the programme itself. “When an event of this nature occurs, it affects fiscal outcomes and macroeconomic conditions, and those effects are taken into account during programme reviews,” he said.
The cyclone has also affected the programme’s timeline. Papageorgiou noted that the IMF team had been preparing to take the fifth review of the EFF to the fund’s Executive Board when the cyclone occurred. The review process has since been paused to allow for damage assessments and updated projections to be completed.
Debt sustainability holds for now, but depends on growth
Responding to a query on whether cyclone-related losses could undermine the debt sustainability analysis, Papageorgiou said the IMF believed the framework could accommodate additional spending linked to reconstruction and support, at least at this stage.
“At the time of our earlier assessment, we concluded that there was room within the debt sustainability framework to absorb higher spending related to recovery needs,” he said. He described the analysis as dynamic, stating that it depended on multiple interacting variables rather than a single shock.
“For the moment, our assessment is that the framework continues to hold,” he said, while adding that a more comprehensive reassessment would be undertaken once updated data became available.
Regional context, structural constraints
Srinivasan, in his regional outlook, provided context for Sri Lanka’s position. He said global growth was expected to remain resilient over the next two years, with Asia continuing to account for roughly 60% of global growth.
The region, he noted, had adapted to trade disruptions more effectively than expected, partly because actual tariff increases had been lower than initially announced and partly because of supportive financial conditions and strong technology-related investment.
However, he cautioned that medium-term growth across Asia was significantly lower than pre-pandemic levels. While recent data have exceeded expectations in several countries, risks remain skewed to the downside, including renewed trade tensions, tighter financial conditions, and higher debt servicing costs.
One structural concern he highlighted is youth unemployment. In several Asian economies, growth has not been sufficient to generate enough jobs, particularly as labour forces expand. Addressing this, he said, required stronger investment and improvements in labour force skills.
“A key factor is the skilling of the labour force,” he said. “Improving education systems and skills makes workers more employable and helps reduce youth unemployment.”
Trade, investment barriers remain binding constraints
Srinivasan also pointed to trade integration as a key determinant of future growth. While Asia has benefited significantly from trade over past decades, he said intra-regional integration remained limited, largely due to high non-tariff barriers. He identified South Asia as the least integrated sub-region, noting that it faced the highest non-tariff restrictions.
Srinivasan extended this diagnosis to Sri Lanka’s domestic policy framework. He said that Sri Lanka’s tariff structure, alongside non-tariff barriers, required review. He also pointed to the need to improve domestic market access, strengthen incentives for foreign direct investment, remove regulatory impediments, and update associated legislation.
“There’s not just one thing that holds back investment or trade,” he said. “It’s a collection of issues that need to be addressed together.” He added that the Government was aware of these challenges and that the IMF was working alongside other development partners to support reform efforts in these areas.
Economists’ perspectives
Verité Research Lead Economist Raj Prabu Rajakulendran said the focus should be on how climate events affected underlying vulnerabilities rather than on headline output alone, noting that short-term growth figures could mask deeper stress.
“Even based on experiences such as the tsunami, we didn’t see negative growth,” he said. “You could reasonably assume that even for Cyclone Ditwah, there wouldn’t necessarily be negative growth.”
He explained that GDP measurements often neutralised short-term losses because reconstruction activity offset initial disruptions. “The economy suffered for a short period, but other industries reactivated,” he said. “There was a significant rebuilding effort that partly offset those effects.”
Rajakulendran said high-frequency indicators such as the Purchasing Managers’ Index would provide earlier insight into how the economy is responding after the cyclone, particularly across manufacturing and services. “Those indicators come out quite quickly and on a monthly basis,” he said. “They tell you what is happening on the ground before the national accounts are released.”
On the fiscal side, Rajakulendran said the IMF programme allowed flexibility to accommodate disaster-related spending, but that such flexibility still required careful justification and financing discipline. He noted that additional expenditure linked to relief and reconstruction could push spending above programmed levels this year.
“The IMF is generally open to flexibility if authorities can clearly show where the spending is going,” he said, adding that financing choices mattered as much as headline fiscal space.
Frontier Research Head of Macroeconomic Advisory Chayu Damsinghe made a similar point, cautioning against interpreting damage estimates as immediate fiscal costs. “The damage figures being discussed are not necessarily immediate costs,” he said, noting that recovery and reconstruction spending typically took place over several years rather than all at once.
From that perspective, he said, near-term fiscal and debt dynamics remained manageable provided macroeconomic discipline were maintained. “We have managed it reasonably well this year,” he said, referring to recent performance under the current framework.
Stabilisation achieved, growth still unresolved
Based on the comments, Sri Lanka has made substantial progress in restoring macroeconomic stability, controlling inflation, and strengthening fiscal performance. These achievements have reduced immediate crisis risks and restored a measure of predictability to economic policy.
At the same time, the transition from stabilisation to sustained growth remains uncertain. Trade policy complexity, investment barriers, labour market constraints, and exposure to external and climate-related shocks continue to weigh on medium-term prospects.
Source: The Sunday Morning
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