Sri Lanka’s Economic Reform Program is Delivering—Keep Going for a Full Recovery

IMF News, March 25, 2025

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Canonical URL: Sri Lanka’s Economic Reform Program is Delivering—Keep Going for a Full Recovery

The program reached its mid-point in March, marking two years since inception of a four-year economic reform program supported by the IMF.
Economic growth: "It grew 5 percent in 2024."
Output recovery: "in a mere 18 months recovered just under half of the output lost from the peak in 2018 to the nadir in 2023."
Inflation: "Skyrocketing inflation has been halted."
Tax revenue and fiscal stance:
- "Tax revenues as a share of GDP are up by more than two thirds."
- "The government’s balance excluding interest payments (primary balance) has improved by nearly 6 percentage points."
Macroeconomic context: "The macroeconomic turnaround is remarkable even as many households are yet to feel the impact."

External creditor actions:
- "External creditors have forgiven $3 billion in debt."
- Creditors "stretched another $25 billion due in the near term or already overdue over a much longer time horizon over the next 20 years with much reduced interest rates."
Market signals and credit metrics:
- "Sri Lanka’s tradeable debt instruments are once again attractive to investors as they have been included in international bond indices and Sri Lanka’s credit rating was upgraded by at least 3 notches."
- Domestic borrowing cost: "sharp declines ... from a peak of 30 percent in 2023 to currently 8 percent."
- Sovereign risk spread: "from a peak of 70 percent to 5 percent."
Outlook: "Responsible international market access should be within reach in the next few years."
IMF financing role: "IMF financing since 2023 has helped avoid more dire outcomes ... The IMF-supported economic program continues to provide a credible framework for committing to reforms that catalyze financing from other multilateral and bilateral partners."

Immediate service improvements: "there are no more lines for fuel, cooking gas and medicines and no scheduled power outages."
Burden on households:
- "The Sri Lankan people are paying a regrettably high price for past policy missteps and insufficient preparation for the bad luck that struck."
- Tax policy change effects: "taxpayers have had to shoulder a higher burden, even as they are asked to contribute commensurate with their income and wealth."
- Subsidy removal: "the full cost of fuel and electricity is now borne by their users without subsidies by the government, allowing scarce public resources to be directed to priority areas such as social protection."
Targeted relief and adjustments after elections:
- "The personal income tax regime was adjusted."
- "Public sector wages are being raised to partially compensate for past high inflation."
- "Some relief was provided to users of dairy products."

Historical caution: "About half of IMF programs Sri Lanka has had prior to the current one, ended prematurely, often followed by economic underperformance."
Narrow path to sustainability: "The path to stable and inclusive growth and fiscal and debt sustainability remains narrow. There is no room for policy errors."
Key policy priorities (explicit):
- "Continue to deliver revenues needed for essential government services, including by limiting tax exemptions."
- "Restore cost-recovery pricing for fuel and electricity."
- "Ensure social support is well-targeted towards the most disadvantaged."
- "Protect scarce public resources."
- "Capital spending in support of medium-term growth should be executed more predictably."
Equity and inclusion: "The poor and vulnerable need to be given the opportunity to adequately participate in the economic turnaround."

Central recommendation: "Keeping the reform momentum going will be key for a full recovery, benefitting not only this generation but future ones as well."
IMF commitment: "The IMF will remain a steadfast partner to support Sri Lanka in securing a strong and durable recovery improving the lives and livelihoods of all citizens."
Authors and provenance:
- "Peter Breuer is the IMF’s former Mission Chief for Sri Lanka; and Martha Tesfaye Woldemichael is the IMF’s current Resident Representative in Sri Lanka."
- Publication timing: op-ed originally published in March 2025.

Op-ed by Peter Breuer and Martha Tesfaye Woldemichael, IMF Communications Department, March 25, 2025.

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