IMF Approves Third Review of Sri Lanka’s Extended Fund Facility, Disbursing $334 Million

The International Monetary Fund (IMF) has completed the third review of Sri Lanka’s 48-month Extended Fund Facility (EFF), allowing the country to draw SDR 254 million (approximately US$334 million) in support of its economic reforms and policies.

With this latest disbursement, Sri Lanka has so far received SDR 1.02 billion (around US$1.34 billion) from the IMF under the program, which was initially approved on March 20, 2023, with a total funding allocation of SDR 2.286 billion (about US$3 billion).

Economic Recovery and Challenges

The IMF praised Sri Lanka’s economic performance, noting that all quantitative targets for December 2024 were met, except for the indicative target on social spending. The institution also acknowledged that most structural benchmarks due by January 2025 were either achieved or faced minor delays.

According to IMF Deputy Managing Director Kenji Okamura, Sri Lanka’s economic recovery has been remarkable, with inflation remaining low, revenue collection improving, and foreign reserves accumulating. The economy has shown 4.3% average growth since the third quarter of 2023, and by the end of 2024, Sri Lanka’s real GDP is estimated to have recovered 40% of its losses from 2018-2023.

Despite these positive indicators, the IMF warned that the economy remains vulnerable, emphasizing the need to sustain the reform momentum to ensure macroeconomic stability and debt sustainability.

Key IMF Recommendations

1. Sustaining Fiscal Reforms:

   • Strengthening tax compliance and avoiding tax exemptions to maintain revenue growth.
   • Ensuring social spending targets are met to protect the most vulnerable communities.
   • Restoring cost-recovery pricing for electricity to reduce fiscal risks from state-owned enterprises.

2. Debt Sustainability & Monetary Policy:

   • The successful completion of Sri Lanka’s bond exchange was a major milestone in debt restructuring.
   • Finalizing bilateral agreements with official creditors is now a priority.
   • Maintaining price stability while safeguarding Central Bank independence is crucial.

3. Structural and Governance Reforms:

   • Addressing non-performing loans and strengthening state-owned bank oversight.
   • Improving the insolvency and resolution frameworks to boost credit growth.
   • Continuing long-term governance reforms to unlock Sri Lanka’s full economic potential.

IMF’s Outlook for Sri Lanka

The IMF remains optimistic about Sri Lanka’s continued recovery in 2025 but stresses the importance of avoiding policy errors. The organization reaffirmed its commitment to supporting Sri Lanka’s economic reforms and ensuring inclusive growth while maintaining fiscal discipline.