The International Monetary Fund has approved the fourth review of Sri Lanka’s USD 3 billion loan under its Extended Fund Facility (EFF), which has now unlocked a new transfer of around USD 344 million. While the IMF Executive Board has yet to release a formal statement, the approval has been officially confirmed by Sri Lankan officials and national media and represents another key milestone in the country’s delicate recovery.
This approval comes after a staff-level agreement was reached in April, with IMF teams assessing Sri Lanka’s economic performance, reform efforts, and debt restructuring progress.
The IMF’s technical briefing concluded that Sri Lanka has “made strong progress” since the recent height of its crisis. Some of the main areas of progress included development of a 5% growth rate in 2024, growth in both reserves of foreign exchange, inflation numbers declining, and revenue collection improving.
The country introduced politically sensitive reforms. For example, Sri Lanka had to move towards the implementation of cost-reflective electricity tariffs as a condition for structural reforms under the IMF. Sri Lanka held electricity prices down artificially low for many years, which forced the government to cover enormous losses at the state-owned Ceylon Electricity Board (CEB), which not only influenced public finances but further exacerbated the debt crisis.
The IMF delegation headed by Mission Chief Evan Papageorgiou noted that levels of real economic activity appear to be showing stabilization but cautioned that there are still downside risks to consider, especially around the sustainability of the debt, political commitment, and global volatility in the financial markets.
Rebuilding After The Fall
Sri Lanka’s ongoing loan was catalysed by a domestic economic meltdown in 2022. It defaulted on its foreign debt obligations, ran out of dollars, and witnessed enormous protests that forced its president, Gotabaya Rajapaksa, to resign. The IMF program was intended not only to provide a capital injection but also to push the country to reform its long-standing problems of poor tax collection, over-leveraged state enterprises, and poor fiscal transparency.
Each of the reviews prescribed in the EFF functions as a checkpoint. If Sri Lanka doesn’t meet the targets agreed to, the next disbursement will be delayed. This, therefore, was a critical fourth review, not only to receive money but also to manage the confidence of investors and keep others in the capital structure, China, India, and bondholders involved.
Even with this progress, the IMF noted that Sri Lanka cannot afford to rest where it is. Several reforms are still in progress, however, including improved transparency in public finance and attention to reducing losses in state-owned enterprises. Debt restructuring is nearly complete, although it still relies on the finalization of agreements with external creditors.
The approval of the fourth review of the IMF’s Extended Fund Facility means total disbursement from the IMF under the program is now around USD 1.72 billion. The next review will again test the government’s capacity to stay on track, notably as political heat rises ahead of elections.
Until then, Sri Lanka remained on an IMF lifeline, carefully reorienting itself after collapse but still walking the tightrope of its fiscal situation.
