IMF approves $336m disbursement for Sri Lanka

The International Monetary Fund (IMF) approved a $336 million disbursement to Sri Lanka, marking a positive step in the country’s economic recovery programme. This brings the total IMF financial support to Sri Lanka to roughly $1 billion.

The IMF Executive Board completed the second review under a 4-year Extended Fund Facility (EFF) arrangement with Sri Lanka, allowing them to draw SDR 254 million ($336 million).

Sri Lanka is showing signs of economic improvement, with three per cent real GDP growth in the second half of 2023, low inflation (0.9 per cent in May 2024), and rising international reserves ($5.5 billion by April 2024).

The primary budget balance is also in surplus, with tax revenue reaching 9.8 per cent of GDP in 2023.

Despite these positive developments, vulnerabilities persist. The banking sector still faces issues with non-performing loans, and the medium-term growth outlook depends on policy decisions.

Projected growth is moderate for 2024-25 due to limited credit and fiscal consolidation. Additionally, debt restructuring and upcoming elections create uncertainty.

The IMF emphasised the need for continued reforms to ensure lasting progress. These include:

• Maintain revenue mobilisation efforts, finalise debt restructuring, and prioritise social and capital spending. Enhance fiscal discipline through improved public financial management and a stronger debt management framework.
• Ensure price stability by avoiding monetary financing and safeguarding central bank independence. Maintain exchange rate flexibility and gradually phase out balance of payments measures to rebuild external buffers.
• Improve bank capital adequacy and strengthen governance in state-owned banks to revive credit growth and support economic recovery.
• Implement governance reforms, promote trade liberalisation and foreign investment, upgrade skills and female labour force participation through labour reforms, and improve efficiency and transparency in state-owned enterprises.

The IMF acknowledges Sri Lanka’s progress but warns that continued reform efforts are crucial to mitigate risks and unlock the country’s long-term economic potential.

Attribution: International Monetray Fund’s report