The International Monetary Fund’s First Deputy Managing Director Dr. Gita Gopinath was upbeat when she spoke about Sri Lanka’s hard earned recovery since sovereign debt default was announced in 2022.
Sri Lanka is at a critical juncture in its economic recovery. Under the IMF-led bailout package the country has been able to achieve stability amid drastic change in its political and investment climate. And now, the island nation is lest to face many global changes including Donald Trump’s tariff on the trade and impacts on uncertain challenges due to instability in the Middle East after US-backed Israel’s provoking attack over Iran.
“Just two years ago, it was going through in a very severe crisis. And also progress that has been achieved is truly remarkable over a very short period of time,” Gopiath told a Central Bank’s conference.
“And you can take this from the IMF, we have 191 member countries, we pay very close attention to economic policies of all of our members, and it is very substantial the progress that has been achieved in Sri Lanka over a very short period of time.”
Sri Lanka sees economic growth now, inflation is still negative, the reserves have risen, and rupee exchange rate has stabilised under the IMF program amid the current Government’s strategic decision to continue the global lender’s programme without any change.
Gopinath said the country’s people have gone through “bold, courageous, difficult reforms”.
People’s sacrifice
“I want to recognise this, the commitment and the endurance of the people of Sri Lanka, substantial progress has been made to bring back macroeconomic stability and reduce the hardships that people are facing,” she said.
“Going forward, there were big milestones that were achieved, and I want to recognise some Central Bank independence is a big milestone, improving public financial management, another critical accomplishment, and strengthening the legal framework of anti corruption.”
“All of this is not just building institutions for its own sake, but it also delivers a lot of economic return to the country. Our own analysis shows that if a comprehensive governance reform is undertaken in Sri Lanka, it can increase GDP by more than seven percent over the next decade and reduce the debt to GDP by more than six percentage points.”
Sri Lanka has achieved substantial gains in tax revenue collection and fiscal discipline.
Gopinath said Sri Lanka took “a difficult decision” to restructure its debt, and that was another important thing to recognise.
“If Sri Lanka had not done that, the adjustment that people of Sri Lanka would have had to bear would have been even greater. And so going through this process of debt restructuring, they were able to provide some more relief for the people, external creditors have again forgiven about $3 billion in debt,” she said.
“Another $25 billion in debt has been restructured, and we’ve extended repayment over two decades and at lower interest rates, and now Sri Lanka is Sri Lanka’s bonds are once again included in global indices, and its credit rating has improved. So I want to say this year, which is that the experience of Sri Lanka has actually provided very important lessons for the world.”
“External debt servicing as a share of GDP over the next decade has been reduced by a half, and external and total debt stock would fall by 27 and 34 percentage points of GDP.”
She said Sri Lanka’s recovery would be a lesson for the rest of the world in future given the rapid speed it has done with painful adjustments.
However, Sri Lanka is still not out of woods.
Debt sustainability challenges
One of the central concerns over Sri Lanka’s economic recovery under the IMF program is the sustainability of its debt restructuring strategy.
While the Government has made significant progress in negotiating with bilateral and private creditors, critics said argue that the current approach—favouring maturity extensions over outright debt write-downs—only delays the pain rather than resolving the crisis.
The burden of repayment is expected to grow again by the early 2030s, placing future budgets at risk.
Moreover, questions remain about China’s full participation on equal terms, raising concerns over transparency and equitable treatment of creditors.
Social impact
Sri Lanka’s IMF-backed reforms, particularly tax hikes and cuts in energy subsidies, have disproportionately affected low- and middle-income households.
While the IMF and the Government emphasize social safety nets like the Aswesuma cash transfer program, implementation gaps and targeting inefficiencies have left many vulnerable groups exposed.
The poverty rate remains high (around 24.5%), and inflation—although stabilized—has eroded real incomes over the last two years.
The recovery, critics said is not inclusive, and could deepen inequality if fiscal consolidation continues without meaningful redistribution.
Although the IMF’s governance diagnostic for Sri Lanka was hailed as a landmark initiative, tangible improvements in anti-corruption enforcement and public financial management have been limited.
Laws have been passed—including the Anti-Corruption Act—but critics allege selective implementation and continued protection of political elites.
Allegations of favouritism in procurement, lack of transparency in State enterprise restructuring, and weak oversight mechanisms continue to undermine public trust.
Without credible institutional reform, many believe the benefits of the IMF program may be captured by a narrow political and business elite.
Revenue mobilisation and policy credibility
Sri Lanka’s tax-to-GDP ratio has improved, rising to approximately 13.5 percent in 2024, but it still falls short of pre-crisis levels and the IMF’s 15 percent target.
Revenue mobilisation efforts—primarily through VAT and income tax reforms—have faced backlash from unions, small businesses, and middle-class professionals.
The Government’s occasional reversals on tax policy to appease political constituencies have raised questions about its commitment to long-term fiscal discipline.
These inconsistencies may undermine policy credibility, which is critical for sustaining both investor confidence and IMF support.
While macroeconomic indicators such as reserves and inflation have improved, structural reforms—particularly in state-owned enterprises (SOEs), trade liberalisation, and labour market efficiency—remain sluggish.
Efforts to privatise or reform loss-making SOEs such as the CEB and CPC have faced political resistance and labour unrest.
Trade reforms are slow, and productivity growth is stagnant.
Without deeper structural change, Sri Lanka risks falling back into a cycle of external vulnerability and dependence on external financing.
The IMF has warned that without full program implementation, the hard-won gains may be quickly reversed.
Sustaining gains
Dr. Gita Gopinath’s visit marks a pivotal moment: it validates Sri Lanka’s macro-recovery, debt sustainability efforts, and institutional reforms.
Yet, Sri Lanka has fragilities—governance gaps, elite capture, fiscal social trade-offs, and geopolitical risk.
The critical test ahead: can Sri Lanka convert IMF-backed frameworks into enforceable, inclusive, and resilient reforms—breaking its historic cycle of half-abandoned programs?
Only sustained implementation, transparent elite accountability, and a calibrated marriage of austerity and welfare will determine whether this becomes the last IMF program—genuinely.
