The Sri Lanka IMF program is set to expand as the country prepares for an eighteenth engagement with the lender amid rising fiscal pressures. A new review early next year and growing post-cyclone spending are reshaping expectations for economic stabilization.
Sri Lanka IMF program advances as fresh review and rapid aid follow cyclone spending surge
Sri Lanka is preparing to embark on its eighteenth engagement with the International Monetary Fund, a development that comes scarcely a year after policymakers expressed optimism that the current Extended Fund Facility could mark the end of recurring bailout cycles. The shift signals a complex intersection of policy pressures, disaster-related expenditure, and lingering structural weaknesses that continue to restrain long-term stability. A new IMF team is scheduled to arrive in January to assess the country’s evolving fiscal landscape, a visit later confirmed by the Fund as part of its ongoing monitoring.
President Dissanayake indicated that next year’s national budget includes an additional 500 billion rupees in spending linked to Cyclone Dakwah. That expansion, coming on top of existing obligations, will require adjustments to fiscal targets embedded in the Staff-Level Agreement under the current Extended Fund Facility. The increase in expenditure underscores the government’s commitment to recovery while raising fresh questions about the sustainability of consolidation efforts that were central to the IMF’s initial program framework.
The IMF is expected to support Sri Lanka through a 200-million-dollar Rapid Financing Instrument, a tool specifically designed for countries encountering urgent balance of payments pressures. Distinguished from long-term programs, the RFI carries fewer conditions, requires no periodic reviews, and provides swift liquidity intended to avert severe economic dislocation. Its use suggests that authorities face immediate financing needs, even while an active Extended Fund Program remains in place with more stringent conditionality and reform requirements.
According to IMF data, Sri Lanka owes approximately 226 million dollars to the Fund in 2025, reflecting repayments linked to programs initiated after past balance of payments crises. Earlier liquidity injections and rate cuts in 2014 and 2015 amplified vulnerabilities, laying the groundwork for the instability that followed. The more recent crisis, driven by aggressive easing in 2020, culminated in external default and the sale of Special Drawing Rights for short-term relief, which now incur additional charges.
The country’s long history with the IMF traces back to the collapse of the Bretton Woods system and the ensuing global inflation. After 1971, Sri Lanka began entering successive arrangements as monetary instability increased, and by the 1980s the rupee experienced steep depreciation alongside rising social unrest. Even in 2025, the currency continued its downward trajectory from 297 to 308 to the dollar despite strong current account surpluses and reduced fiscal deficits, outcomes that analysts argue point to shortcomings in the operating framework of the central bank rather than in domestic revenue or spending flows.
Historical precedent illustrates the sensitivity of the monetary system to shocks. Following the 2004 tsunami, disruptions to the credit system initially strengthened the currency before it was weakened by liquidity injections intended to counteract lost tax revenues. Aid inflows, often directed to private entities that subsequently sold foreign currency into the market, added further complexity. Since the central bank’s establishment in 1950, the rupee has declined from 4.77 to more than 300 to the dollar, reflecting repeated cycles of intervention and misaligned policy choices.
Recent scrutiny from the Committee on Public Finances highlights concerns surrounding the central bank’s domestic swap operations. By borrowing in dollars and lending in rupees, these swaps are used to suppress interest rates but expose the bank to significant foreign exchange losses once the currency depreciates. Analysts compare the situation to the collapse of the Eastern and Oriental Bank in 1884, where mismatches between assets and liabilities contributed to its failure. The British authorities later replaced the system with a currency board that ensured external stability for decades until the central bank’s creation.
As borrowing expands and credit demand recovers, the underlying vulnerabilities of Sri Lanka’s monetary framework become increasingly visible. Experts note that instability can emerge swiftly when credit conditions tighten improperly, recalling that financial troubles surfaced as early as 1952 under the newly formed central bank despite initially sound fundamentals. Historical banks of issue that made structural errors often shuttered permanently rather than being revived by successive IMF interventions, a contrast to the modern pattern of recurring programs.
The IMF itself was designed to safeguard exchange rate stability under the Bretton Woods system, protecting global trade from the harmful effects of sharp depreciation. Following the collapse of that system, however, the Fund shifted toward supporting countries pursuing “competitive” exchange rates, a strategy critics argue contributed to extensive inflation and instability. Sri Lanka’s ongoing challenges, including inflation targeting without a fully flexible exchange rate, as well as periodic tax and rate cuts aimed at stimulating growth, have prolonged reliance on external support.
Although there was a period of reduced engagement between 1994 and 2009, the 1980s and early 1990s saw nearly continuous IMF involvement. Even two parallel programs in 2003—an Extended Fund Facility and Extended Credit Facility—were abandoned following a political transition. The IMF later closed its Colombo office during subsequent periods of uncertainty. Structural constraints remain unresolved, including the government’s lack of foreign currency revenue streams due to central bank privileges under “Government Acceptance,” which forces the Treasury to seek external financing repeatedly. Despite reports that the Treasury currently holds substantial cash buffers, the upcoming eighteenth program reflects the scale and persistence of underlying weaknesses.
Sri Lanka’s renewed move toward the IMF also follows uneven reserve accumulation in recent months, as credit expansion and a single policy rate under technical guidance pushed liquidity pressures higher. Despite these challenges, IMF leadership has expressed hope that this cycle can mark a turning point. “This time must be different,” First Deputy Managing Director Gita Gopinath said earlier this year, urging policymakers to ensure that Sri Lanka’s newest engagement becomes its last.