The IMF Executive Board recently completed its fourth review under the Extended Fund Facility (EFF) with Sri Lanka, providing the country with immediate access to about US dollars 350 million to support Sri Lanka’s economic policies and reforms.
In doing so, the IMF observed that performance under the bailout programme has been generally strong with some implementation risks being addressed. “All quantitative targets for end-March 2025, except the stock of expenditure arrears, were met. All structural benchmarks due by end-May 2025 were either met or implemented with delay. 2025Q2 inflation fell below the lower outer band of the Monetary Policy Consultation Clause largely due to energy prices. Debt restructuring is nearly complete. The economic outlook remains positive. However, global trade policy uncertainties pose significant risks to Sri Lanka’s macroeconomic and social stability. If these shocks materialise, the authorities will work closely with staff to assess the impact and formulate policy responses within the contours of the programme,” the IMF said.
It is in this background that the revised US tariff, assigned by President Donald Trump of 30% has been slapped on Sri Lanka, making the islands exports to their key market (the US) at significant risk, and making some observers warning of capital and industry flight to more competitive places like the Philippines, Vietnam and other destinations in South East Asia. Sri Lanka is not out of the crisis yet.
Meanwhile at home, while the new tariffs risk more unemployment, Sri Lanka’s estimated poverty remains high. Last year it rose to almost a quarter of the population, which is twice as high as in 2021. According to a new study by the Centre for Poverty Analysis (CEPA) the economy has stabilised remarkably well since weathering its worst economic crisis since Independence, but there are substantial risks of a relapse. The country now needs to continue with macroeconomic stabilisation and implement a range of growth policies, with a new focus on State capacity. The report offers a roadmap for Sri Lanka to achieve sustainable and inclusive economic growth over the coming five years. Authored by Independent Growth Study Group, the report provides critical policy recommendations for navigating the country’s complex economic landscape as it emerges from its worst economic crisis since Independence. It stresses that the persistent challenge of high poverty levels requires a focus on economic transformation with structural reforms and targeted sectoral policies to mitigate future risks and unlock the nation’s vast potential. Dr Ganeshan Wignaraja, Visiting Senior Fellow at ODI Global and Convenor of the Independent Growth Study Group, said: “Sri Lanka has shown remarkable resilience in overcoming recent economic hardship, but the journey towards prosperity requires more than resilience – it demands bold action. This report provides a crucial framework, not just for consolidating the hard-won gains of stabilisation, but for igniting truly transformative growth that uplifts all Sri Lankans. The opportunity is here, and we must act decisively to create a more inclusive and resilient economy.”
The report identifies six key policy areas as crucial for achieving sustainable growth; maintaining macroeconomic stability, integrating into global supply chains, improving factor markets, implementing targeted sectoral policies, reducing poverty and building political consensus. It also highlights key sectors poised for growth, including tourism, the digital economy, niche manufacturing and agriculture, driving the economic transformation of Sri Lanka in the future. The report urges a concerted effort to leverage Sri Lanka’s strategic location and build on existing production capabilities to drive growth and reduce poverty. It emphasises the importance of strategic engagement with global and regional supply chains and the digital economy to boost exports and attract foreign investment.
The Government must realise that welfare programmes alone will do little to raise nearly a quarter of the population from poverty and put them on a path to aid improving national growth. The bitter and difficult reforms process must continue, and so much a consolidated effort to orient those below the poverty line to rise above it. Hands out will not get us out of trouble, reforms, good policies, good governance and economic growth will.