The International Monetary Fund has concluded a staff-level agreement with Sri Lanka that is expected to free up about $700 million in financing once the deal receives formal approval, the fund said on Thursday. The IMF conditioned the release on the advance of economic reforms designed to shore up stability and support continued recovery.
According to the lender, Sri Lanka remains on a recovery path following its deepest economic downturn in decades, which culminated in a foreign debt default in 2022 and led to a $2.9 billion IMF-supported program. The IMF noted the country’s reform agenda has underpinned the rebound but cautioned that new external shocks and domestic damage have made it imperative to press ahead with policy steps.
Evan Papageorgiou, the IMF’s mission chief for Sri Lanka, said the conflict involving Iran has amplified energy prices, disrupted an important aviation hub for tourists and affected Sri Lankans working in the region. The IMF added that the government needs to "build back better" after Cyclone Ditwah, underlining the dual pressures of higher global energy costs and weather-related damage.
"Advancing reforms is even more critical now to safeguard macroeconomic stability and maintain the economy on a path towards recovery and inclusive growth," the IMF said in its statement.
The IMF highlighted that U.S.-Israeli strikes on Iran had interrupted energy flows from the Middle East prior to a ceasefire on Tuesday, constricting supplies and encouraging Asian countries to respond to tighter markets and elevated prices. Sri Lanka has experienced direct effects: rising energy costs have strained the country's foreign exchange reserves and spurred policy responses at home.
Measures already implemented by the Sri Lankan government include instituting public holidays on Wednesdays, rationing fuel supplies and raising retail pump prices by roughly 35% last month in an effort to curb consumption. To secure more stable fuel availability the government is negotiating with China, India and Russia and plans to spend about $600 million to purchase refined fuel for April.
The staff-level agreement with the IMF is intended to provide near-term financing support, contingent on the continuation of the reform program and the authorities' response to the external pressures described by the IMF.
Key points
- The IMF staff-level agreement would unlock about $700 million once approved and calls for advancing reforms.
- Higher energy prices tied to the Iran conflict and cyclone damage have increased pressure on Sri Lanka's foreign exchange reserves and prompted fuel rationing and price hikes.
- Sri Lanka is negotiating with China, India and Russia for fuel supplies and plans to spend $600 million on refined fuel for April.
Risks and uncertainties
- Continued elevated energy costs could further erode foreign exchange reserves and strain public finances - this primarily affects the energy and fiscal sectors.
- Disruptions to tourism and remittances associated with regional conflict could slow economic recovery - this impacts tourism, services and external income flows.
- Damage from Cyclone Ditwah means recovery efforts must contend with reconstruction needs alongside macroeconomic repair - this affects public spending priorities and insurance-related sectors.