Fourth Review highlights strong progress, but IMF warns of risks from underreported arrears, global trade turbulence, and fiscal slippage
The International Monetary Fund (IMF) has commended Sri Lanka for maintaining strong reform momentum under its Extended Fund Facility (EFF) program but stressed the need to continue these efforts as global uncertainties threaten to derail recovery.
IMF Mission Chief for Sri Lanka, Evan Papageorgiou, speaking during a press briefing, said the country’s performance under the Fourth Review was “generally strong,” with all quantitative targets met — barring an issue with underreported government expenditure arrears, which the IMF accepted after corrective action and granted a waiver.
On July 1, Sri Lanka secured a $350 million disbursement, bringing the total under the EFF program to $1.74 billion. This marks another vote of confidence in Sri Lanka’s post-crisis economic strategy.
Papageorgiou emphasized the importance of sustaining reform momentum amidst growing external risks, particularly volatility in global trade policies. “If shocks materialize, the authorities should coordinate with the IMF to assess impacts and adapt policy responses accordingly,” he noted.
He acknowledged that underreported arrears — mainly linked to interest subsidies for senior citizens and data reporting gaps in line ministries — caused Sri Lanka to miss the quantitative performance criterion on arrears in the past three reviews. However, after taking corrective measures and setting up a plan to clear the arrears, the IMF allowed the review to proceed.
A key focus of the review was the electricity tariff policy. The IMF highlighted that restoring and maintaining cost-reflective tariffs is essential for long-term fiscal health and energy sector sustainability. The current pricing model, which cross-subsidizes smaller users, is being reassessed with input from the World Bank and Asian Development Bank, with revisions expected by November.
Papageorgiou urged Sri Lanka to continue its revenue-based fiscal consolidation path, noting that revenue had increased from 8.2% of GDP in 2022 to a projected 13.9% by 2025, targeting a primary surplus of 2.3%.
He also warned against non-transparent tax exemptions, which previously led to significant revenue losses and corruption risks. Structural reforms include amending the Strategic Development Projects (SDP) Act by August and the Port City Act by October. These steps are aimed at establishing a transparent, rule-based tax exemption framework to foster investor confidence and protect fiscal integrity.
Papageorgiou acknowledged strong progress in governance reforms, improved tax compliance, and rising business confidence since 2024. He stressed the need to further strengthen public financial management, state bank governance, and address non-performing loans to create a more resilient economy.
On the debt restructuring front, Sri Lanka has secured bilateral agreements with Japan, France, and India, moving closer to a comprehensive solution.
Adding to the commentary, IMF Resident Representative Martha Tesfaye Woldemichael praised Sri Lanka for significant governance achievements, including enacting the Anti-Corruption Act and safeguarding Central Bank independence.
She highlighted Sri Lanka’s milestone as the first Asian country to undergo an IMF Governance Diagnostic Assessment, the results of which are now embedded in the EFF program.
Woldemichael underscored the Government’s Governance Action Plan published in February 2025, which includes key reforms like asset recovery laws, tighter procurement, and enhanced Customs and asset declaration systems. “We hope Sri Lanka will continue prioritising these structural reforms to ensure transparency and long-term economic resilience,” she said.