Sri Lanka central bank IMF World Bank involvement is under sharp scrutiny as the nation grapples with past economic missteps and prepares to avert a second external default through genuine reform and clarity of economic doctrine.
Sri Lanka central bank IMF World Bank must abandon ideological policy traps
Sri Lanka finds itself at a pivotal crossroads where the role of its central bank, along with guidance from the IMF and the World Bank, is being intensely questioned. The debate centres on whether the country should persist with ideologically driven monetary and fiscal frameworks—or pivot towards classical economic principles that emphasise stable currency, market confidence and capital formation.
The historical path is instructive. In the period leading up to Sri Lanka’s Latin-America-style default in peacetime, the island nation adopted monetary and fiscal approaches that critics now describe as second-hand doctrines of the type propagated by the IMF and related agencies. These policies emphasised central bank control, single policy rates, and inflation targets that echoed interventionist or Marxian frameworks rather than classical economists like Ricardo, Hume or Say.
When the external crisis erupted, a shattered rupee required swift confidence restoration. The central bank moved to defend the domestic currency monopoly rather than allowing more flexible arrangements such as dollarisation. At that time the IMF’s advice focused on monetary “modernisation” and interest-rate policy rather than freeing capital flows and enabling a robust private sector rebound. The result was a harsh adjustment, rising interest rates, deep economic contraction and an eventual external default.
Today, observers warn that Sri Lanka again risks repeating the same pattern. The conventional wisdom within the central bank, and the policy apparatus shaped by the IMF and World Bank, still emphasises a single policy rate, inflation targets of 5 % or more and capital-decumulation taxes that discourage private investment. Such measures raise concern that the country may be preparing the groundwork for a second default rather than sustainable recovery.
At the heart of the issue is the rejection of classical liberal economics in favour of interventionist ideologies. Modern training and technical assistance from the IMF and World Bank often echo cost-push inflation theories, heavy statistical frameworks, and weak private capital encouragement. In contrast, the classical political economy tradition emphasised sound money, free markets, savings investment and minimal state interference—principles that many argue would better serve Sri Lanka’s long-term growth.
The suppression of dollarisation and the defence of the money monopoly by the central bank are central concerns. Allowing foreign currency usage or parallel dollar systems could have eased external pressures, stabilised the rupee without high interest rates or harsh contraction, and restored private credit faster. Instead the country underwent deep economic pain, heavy public costs and a delayed recovery path.
Critics argue that the IMF and World Bank, while doing useful work, still preside over frameworks that encourage political-economy distortions. The advocacy of wealth taxes, capital decumulation and state-led monetary control are seen as echoing Marx’s critique of classical economies. The question Sri Lanka must ask is whether it follows a doctrine that stifles capital formation or adopts principles that foster growth, savings, investment and market confidence.
This moment offers an opportunity for reform. Sri Lanka needs to shift away from policies that view private capital as a threat and instead treat it as a pillar of recovery. It must rebuild trust in its monetary system by anchoring the currency, allowing more flexible exchange arrangements, and ensuring the central bank’s balance sheet is transparent and credible. The country should resist expropriatory tax policies that deter investment, and embrace a regulatory environment that incentivises savings, entrepreneurship and productive capital.
Without such a transition, Sri Lanka may remain vulnerable to further crises. The narrative that inflation is half cost-push, half monetary, or that the central bank must always defend major banks and currency at the expense of growth, is outdated and dangerous. Classic economists warned of these dangers decades ago, yet many modern macro-frameworks seem to ignore them.
For Sri Lanka to avoid repeating history, its policymakers must unequivocally commit to economic clarity, intellectual honesty and an investment-friendly environment. The central bank, IMF and World Bank must adapt their approach from ideological repetition to pragmatic economics—anchored not in expropriation but in growth, not in intervention but in market confidence, and not in theory but in performance.