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Lanka posts 4.8% Q1 growth, but IMF warns of downside risks
View(s):The International Monetary Fund (IMF) has stated that Sri Lanka’s growth rate has been at 4.8 per cent in the first quarter of 2025, “outperforming expectations,” and with inflation at -1.1 per cent it is “gradually returning to target.”
The IMF has said that the country’s reserves stood at six billion US dollars at the end of June 2025, and tax revenue collection continued improving, supported by strong performances in VAT and taxes on imported motor vehicles. However, a staff team that concluded a visit to Sri Lanka has pointed out that though the economic outlook is positive, downside risks have increased on the back of potentially high tariffs on Sri Lanka’s exports, persistent trade policy uncertainty, and heightened geopolitical tensions.
“This underscores the critical importance of maintaining the reform momentum and the efforts to rebuild fiscal space and external buffers. These reforms will enhance Sri Lanka’s resilience to shocks and safeguard the hard-won economic progress to date. Should such shocks materialise, they will be addressed within the contours of the EFF (Extended Fund Facility) programme,” a statement from the IMF said.
The IMF mission team led by Evan Papageorgiou, Mission Chief for Sri Lanka, visited Colombo during July 21-25 to discuss recent macroeconomic developments and progress in implementing economic and financial policies under the authorities’ economic reform programme supported by the IMF’s EFF arrangement.
Mr. Papageorgiou, in a statement, said, “The Sri Lankan authorities’ economic reform programme is yielding commendable outcomes.
“Maintaining macroeconomic stability requires sustained efforts to raise fiscal revenues. To continue meeting the medium-term primary balance objective of 2.3 percent of GDP—a key requirement for restoring Sri Lanka’s debt sustainability—the 2026 budget should be underpinned by strong revenue measures and appropriate spending allocations, consistent with program parameters.”
Strengthening the tax exemption frameworks, boosting tax compliance, broadening the tax base, and enhancing public financial management, including to avoid the reemergence of expenditure arrears, are important, the statement pointed out. Upcoming bills on public-private partnerships, state-owned enterprises, public procurement, and public asset management should be consistent with the Public Financial Management Act and best practices, it said.
Cost-recovery energy pricing should be maintained to minimise fiscal risks and support the financial sustainability of the energy utilities. At the same time, protecting the poor and vulnerable through improved targeting, coverage, and adequacy of social support remains critical, the statement said.
It also said: “The debt restructuring process is nearing completion. We encourage a swift completion of bilateral agreements with the remaining official and commercial creditors to restore debt sustainability and regain investor confidence. Progress toward operationalising the Public Debt Management Office should accelerate.
“Monetary policy should remain prudent and prioritise price stability. Central bank independence should continue to be safeguarded, including by refraining from monetary financing of the budget. Continued reserve accumulation and exchange rate flexibility remain key priorities. Resolving non-performing loans, strengthening governance and oversight of state-owned banks, and improving the insolvency and resolution frameworks are important to sustainably revive credit growth and support private sector development.
“A steadfast implementation of governance reforms outlined in the government’s action plan is critical to addressing corruption vulnerabilities. Structural reforms to liberalise trade and investment, increase competitiveness, boost female labour force participation, and address climate change will help raise potential growth.
“Progress in meeting key commitments under the IMF-supported program will be formally assessed in the context of the Fifth Review of the EFF. The timing of the Fifth Review will be discussed with the government.”
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