## Sri Lanka’s Economic Reform Program is Starting to Work—Keep at It for a Full Recovery

_IMF News, February 22, 2024_

## Source details

**Canonical URL:** [Sri Lanka’s Economic Reform Program is Starting to Work—Keep at It for a Full Recovery](https://www.imf.org/en/news/articles/2024/03/01/022224oped-srilanka-economic-reform-program-is-starting-to-work)

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## Bibliographic details
- Published: February 22, 2024

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### Overview and context
- Op-ed by Krishna Srinivasan (Director, Asia Pacific Department) and Peter Breuer (Senior Mission Chief, Sri Lanka), International Monetary Fund.
- Originally published on Sunday Times in Sri Lanka on February 22, 2024; Sinhala and Tamil versions published in the Lankadeepa and Virakesari, respectively.
- Sri Lanka is emerging from an unprecedented economic crisis that imposed significant hardships, especially on the most vulnerable.
- The country and the IMF agreed on a comprehensive economic reform program to address the causes of the crisis and look after those hurt most by the crisis.

### Recent macroeconomic developments and indicators
- The economy grew 1.6 percent from a year earlier in the third quarter of 2023, the first expansion in a year and a half.
- Inflation has moderated significantly.
- Manufacturing and services indicators add to signs of a broadening recovery.
- The IMF recently projected that the economy will expand this year and that growth will accelerate next year.

### Causes of the crisis and fiscal dynamics
- Prior to the IMF program in 2022, government spending was more than twice its revenue.
- With spending on health, education, and other essential services at risk of large cuts and no access to foreign financing, the government borrowed on domestic markets and from the central bank.
- Domestic borrowing raised domestic interest rates and fueled rapid inflation, curbing lending and growth.
- Restoring government revenue to sustainable levels—more in line with Sri Lanka’s past (Chart 1) and peers (Chart 2)—is essential to narrow the gap with expenditures, attract financing partners, and create space to restart economic growth.

### Role and impact of IMF financing
- IMF financing has helped avoid more severe outcomes observed in 2022.
- IMF financing provides time for reforms to work, catalyzes additional financing from other multilateral and bilateral partners, and is expected to assure creditors that debt repayment capacity can be restored and that the reforms merit debt relief.

### Remaining fragilities and risks
- The recovery remains fragile as:
  - Tight borrowing conditions and reduced disposable income hold back consumption.
  - Deep impacts on living standards mean more time and continued reform efforts are needed before the public feels broad benefits.
  - Uncertainties associated with the external debt restructuring and the stability of the policy framework must be resolved for domestic financing conditions to ease.
- When those uncertainties are resolved, domestic financing conditions should ease, allowing the nascent recovery to become more broad-based.

### Policy recommendations and governance priorities
- Maintain and resolutely implement reforms to help achieve a complete recovery.
- Restore tax revenue to sustainable levels to prevent a repeat of the 2022 crisis.
- Those better off will need to contribute more so the government can provide essential services and help those most in need.
- Eliminate corruption and inefficiency:
  - Address corruption, tax exemptions, and non-competitive procurement and allocation practices that imply higher taxes and costs for everyone, hitting the most vulnerable hardest.
  - Continue implementing the recommendations of the IMF Governance Diagnostic Report—the first in Asia—to reduce losses and benefit everyone.
  - Provide a safe space for public engagement in governance as part of prevention.

### Outlook and concluding message
- There is light at the end of the tunnel; continued reforms will accelerate passage through the tunnel and allow this light to become bigger and bigger.
- Maintaining the reform momentum is Sri Lanka’s best hope for recovering from one of its most severe economic crises.

*Op-ed by Krishna Srinivasan and Peter Breuer; originally published on February 22, 2024.*

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## References

- [Sri Lanka and the IMF](http://www.imf.org/external/country/LKA/index.htm)
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- [PRESS CENTER](http://presscenter.imf.org/)
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_Source: https://www.imf.org/en/news/articles/2024/03/01/022224oped-srilanka-economic-reform-program-is-starting-to-work_