When the Extended Fund Facility expires in March 2027, Sri Lanka will have done something few defaulted economies manage, which is to complete a demanding four-year International Monetary Fund (IMF) programme without abandoning it halfway. Revenue has been rebuilt from the ruins of the 2019 tax cuts, the Central Bank has been given genuine independence, fuel and electricity are priced to cost, and a Public Financial Management Act now binds the Treasury to fiscal rules. That is an achievement the country is entitled to savour. It is not, however, a licence to walk away from the discipline that produced it.
The Government’s signals on what comes next have been, to put it kindly, mixed. One senior Minister has declared that Sri Lanka will not enter another programme of the present kind, while a Deputy Minister of Finance has told Parliament that talks are underway on a longer-term, growth-oriented engagement. Three paths are reportedly on the table, namely a successor arrangement on friendlier terms, a shorter stand-by arrangement, or a clean exit. The ambiguity is understandable in a Government answerable to voters wary of austerity, but markets and creditors read ambiguity as risk, and Sri Lanka can ill afford to be read that way.
The case for a clean exit rests on pride and on politics, and neither should be dismissed lightly. A country that has met its targets has earned the right to chart its own course, and a Government elected on a promise of change will be tempted to present the end of the programme as a declaration of economic sovereignty. The difficulty is timing. Repayments on restructured debt will begin to climb steeply from 2028, reserves remain thinner than prudence would demand, and the economy has already shown how exposed it is to an oil shock or a single severe cyclone. To leave the fund’s orbit precisely when the repayment burden rises would be to remove the safety rail at the steepest stretch of the climb.
Yet the opposite course, a fresh borrowing programme bristling with new conditions, would be equally mistaken. Sri Lanka does not need IMF money in the way it did in 2023. What it needs is credibility, the assurance to bondholders, rating agencies, and investors that the reforms of the past four years will not be quietly unpicked once the external auditor leaves the room. A history of 16 programmes before this one, and a habit of backsliding the moment each ended, explains why that assurance cannot simply be asserted.
The sensible middle path is a non-financing arrangement, most obviously the fund’s Policy Coordination Instrument, which offers regular reviews and an IMF seal of approval without fresh borrowing or the stigma that attends it. Should the Government prefer a firmer buffer, a precautionary arrangement it does not intend to draw upon would serve the same purpose while keeping emergency finance within reach. Either option would allow Colombo to claim, truthfully, that it has graduated from crisis lending, while signalling to markets that the policy anchor remains firmly in place.
Whatever the vehicle, 2027 must be the year the reform agenda shifts from stabilisation to growth. The programme repaired the balance sheet, but it did little to cure the conditions that keep investment scarce and exports narrow, from the tangle of land and approval procedures to unreformed State enterprises and a trade policy far more timid than the region it competes with. These are not matters the IMF can resolve on Sri Lanka’s behalf and no successor arrangement should become an excuse for postponing them.
The Government deserves credit for seeing the programme through. It will deserve considerably more if it resists both the temptation to declare victory and the instinct to remain dependent, and instead keeps the anchor in place while it builds the growth the programme was never designed to deliver.