Sri Lanka’s economy grew 4.2% in the second quarter and official reserves reached US$6.9 billion at the end of August, according to IMF staff. The Fund said talks on the seventh review of the country’s programme will continue, meaning no agreement or Board decision has yet been announced.
The International Monetary Fund staff statement, released on 23 September after a mission to Sri Lanka, described progress under the Extended Fund Facility, or EFF. An EFF is a multi-year IMF lending arrangement designed for countries facing deeper structural economic problems. Each review tests whether agreed policies and targets have been met before the programme can move forward.
The staff statement is preliminary. The IMF explicitly said the mission would not lead to a Board discussion and that talks were continuing towards agreement on the policies and parameters needed to conclude the review.
Growth and reserves have strengthened
Staff said activity had expanded for eleven consecutive quarters, with 4.2% growth in the second quarter of 2026. Reserves, foreign currency assets held by the central bank, rose to US$6.9 billion at the end of August. The IMF also said banks remained well capitalised and profitable, fiscal results in the first half were strong, and debt restructuring was largely complete.
Those indicators give the country more protection than it had during its recent crisis. They do not remove the need to manage shocks. Headline inflation reached 8% year on year in August, which the IMF attributed to the global oil-price shock, even though it said expectations remained broadly anchored.
Energy pricing and tax collection remain central
The staff urged Sri Lanka to develop a medium-term revenue strategy, broaden the tax base and reduce exemptions and incentives. The aim is to raise revenue more durably while improving compliance, rather than relying on one-off measures.
It also called for cost-recovery energy pricing. In practice, that means electricity and fuel prices that cover the cost of providing the service, reducing the risk that state-owned enterprises build losses which later become a burden for the public budget.
These recommendations carry a social and political cost because higher administered prices and broader tax collection can affect households and companies. The IMF said stronger social protection should accompany reform, while arguing that the current approach is needed to rebuild fiscal and external buffers.
Inflation target will be reviewed
Staff recommended maintaining the current 5% inflation target and its accountability band at the first statutory review. It said the setting offers flexibility in a country exposed to food and energy-price volatility. The IMF suggested a lower target could be considered later, once Sri Lanka has established a track record of low and stable inflation.
The distinction matters for businesses. A credible inflation framework can help with planning and borrowing costs, but it cannot stop a global oil shock from changing import prices overnight. Greater exchange-rate flexibility is another IMF recommendation intended to help the economy absorb external shocks and rebuild reserves.
External risks have not disappeared
The Fund listed the Middle East conflict, global trade policy and El Niño among the downside risks. The weather reference is relevant for a country with exposure to agriculture, food prices and energy supply. MBN’s examination of El Niño’s effects on food, power and trade explains why the same climate event can reach an economy through several routes.
Staff also pointed to potential growth in the Northern Province through investment in connectivity, skills, agriculture, fisheries, tourism and renewable energy. Those are areas for policy and private investment, not outcomes the IMF says have already been achieved.
Sri Lanka’s recovery has therefore produced tangible gains in growth, reserves and financial stability. The next IMF review will determine whether that progress is enough, alongside further commitments on taxes, energy, investment and governance, to keep the programme advancing.
