-By Economic correspondent
(Lanka-e-News -11.April.2025, 8.25 PM) In the old Greek fable, Sisyphus rolled his boulder up the hill every day, only to have it tumble back. In many ways, Sri Lanka’s economy, even as it climbs out of the ashes of an unprecedented crisis, finds itself on a similarly precarious incline—pressing forward under intense reforms while global tectonics threaten to send it tumbling again.
The International Monetary Fund (IMF), in its latest statement following the fourth review mission under the Extended Fund Facility (EFF), acknowledged the Sri Lankan government’s strong implementation of reforms and its sustained commitment to fiscal and monetary discipline. But it came with a sobering caveat: more time is needed to assess the full implications of global shocks on the island nation’s fragile recovery.
What lies ahead is not merely a technical calibration of numbers or targets. It is a test of political will, public patience, and institutional resilience.
To its credit, Sri Lanka has delivered on many reform promises since entering the IMF program in 2022. Inflation, once galloping at over 70% during the peak of the 2022 crisis, has not only cooled—it’s practically taken a polar plunge. As of March 2025, the headline inflation is at -2.6%. Yes, negative.
The island’s gross official reserves have been rebuilt to $6.5 billion, up from just over $1.9 billion two years ago. That’s no small feat, especially given the rupee’s historic free-fall and the breakdown of confidence in local monetary authorities back in 2022.
Public finances too have seen a facelift. Fiscal reforms—including painful tax hikes and subsidy cuts—have been implemented with what the IMF diplomatically calls “commendable outcomes.” Sri Lanka, long addicted to populist freebies and rent-seeking inefficiencies, seems to be in rehab at last.
Yet, as IMF’s Senior Mission Chief Evan Papageorgiou puts it, this is not the time to pop champagne.
The global landscape, says the IMF, is not cooperating. Elevated uncertainty across financial markets—driven by geopolitical flashpoints (Ukraine, Gaza, Red Sea disruptions), a fragile Chinese recovery, and tightening monetary policies across the West—has reintroduced volatility just when Sri Lanka thought it had found stable ground.
The problem? Sri Lanka’s recovery isn’t happening in a vacuum.
A newly liberalized exchange rate regime and a cautiously reforming trade balance mean the country is now more sensitive to external fluctuations than ever before. Export demand, FDI flows, remittances, and even tourism—all critical recovery pillars—are susceptible to every tremor in global sentiment.
And then there’s oil. With Brent crude inching closer to the $100 mark amid rising Middle Eastern tensions, Sri Lanka’s import bill is under threat again. The island’s fiscal space—hard-earned through unpopular domestic taxes—could quickly be eroded by global forces beyond its control.
The IMF’s call for more time, then, is not a dismissal of the government’s efforts. It’s a reality check: Macroeconomic housekeeping, no matter how rigorous, doesn’t immunize you from a fever when the rest of the world sneezes.
One might be tempted to ask: if the government is delivering, inflation is falling, and reserves are up, why not declare victory?
The answer lies in reform fatigue. The IMF knows well that the most fragile stage of any structural adjustment program is when early gains mask deeper vulnerabilities. Reform momentum can stall when political costs begin to outweigh immediate benefits—especially in democracies with restless electorates and looming elections.
The IMF, therefore, issues a gentle reminder: stay the course.
The prescription? Boost revenue by improving tax compliance, not by increasing rates. Reintroduce an efficient VAT refund mechanism to incentivize formalization. Avoid new tax exemptions at all costs—these have historically been gateways to corruption, leakage, and policy capture.
One standout point: restoring cost-recovery in electricity pricing. In plain terms, this means households and businesses must pay the real price of power. No more budget-bleeding subsidies to loss-making state-owned enterprises. The IMF clearly signals that fiscal risks stemming from utilities must be capped, even if it means short-term pain.
The political costs of such steps are not lost on anyone. After all, price hikes in utilities have been the spark for public outrage in Sri Lanka before. But the alternative—budget blowouts, mounting debt, and macroeconomic relapse—is far worse.
A post-crisis growth rebound of 5% in 2024 might sound impressive—and it is, when viewed against the backdrop of 2022’s -7.8% contraction. But caution is warranted.
This growth, as the IMF notes, is uneven and vulnerable. Much of it comes from base effects and temporary stabilizers. Structural growth—the kind that’s inclusive, job-generating, and productivity-enhancing—is still a work in progress.
The private sector remains hamstrung by high interest rates, a still-recovering financial sector, and uncertain policy signals. SMEs are struggling to access credit. Youth unemployment remains high. And while headline GDP might be ticking upward, household-level recovery is patchy and painfully slow.
This is where the IMF calls for greater social targeting. Protecting the most vulnerable isn’t just a moral imperative; it’s a political insurance policy. Reforms without safety nets are a recipe for revolt.
Fiscal support, the IMF insists, must be time-bound, within budget, and laser-focused. Blanket subsidies are out; data-driven, means-tested transfers are in.
Reform fatigue isn’t just about spreadsheets. It’s about politics.
The current NPP-led administration under President Anura Kumara Dissanayake and Prime Minister Harini Amarasuriya has shown rare fiscal grit for a young coalition government. But the honeymoon won’t last forever. The IMF knows that public patience wears thin when the price of rice, electricity, or medicine goes up—regardless of the promises of macro-stability.
This is why policy continuity is emphasized in the IMF statement. The real challenge lies not in designing reforms—but in shielding them from populist backsliding.
IMF teams met not just with government officials, but also with parliamentarians, civil society groups, and private sector stakeholders. The subtext is clear: build broad consensus, because technical fixes alone won’t carry the weight of systemic change. Reform must survive changes in government, cabinet reshuffles, and even protests.
As talks continue toward a staff-level agreement for the fourth review, the tone is cautious optimism. The IMF is clearly pleased with Sri Lanka’s direction—but it doesn’t want progress to be mistaken for permanence.
There’s still work to be done.
Tax exemptions must be rationalized. The debt restructuring process with external creditors—especially holdouts—must be finalized. SOE reforms need a second wind. And most critically, the credibility of institutions like the Central Bank and Treasury must be rebuilt to withstand political interference and policy flip-flops.
In short: Sri Lanka is halfway up the hill. The boulder hasn’t rolled back—but gravity never sleeps.
If there’s a one-word summary of the IMF’s verdict, it’s “time.” Time to see how global shocks unfold. Time to deepen reforms. Time to gauge whether public patience can keep pace with policy ambition.
But time, as any central banker or finance minister will tell you, is a luxury. Political clocks tick faster than economic ones. Global crises don’t wait for local reforms to mature.
So yes, Sri Lanka needs more time—but it must use that time wisely. Build buffers. Rally political will. Sharpen social protections. Above all, keep rolling the boulder, even when the summit isn’t yet in sight.
Because if there's one lesson from Sri Lanka’s economic phoenix moment, it’s this: recovery is not a destination—it’s a discipline.
-By Economic correspondent
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by (2025-04-11 14:58:08)
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