IMF Grants Sri Lanka $695m Despite Two Missed Conditions

The International Monetary Fund has approved a $695 million disbursement for Sri Lanka following the completion of the fifth and sixth reviews of its economic reform program [3]. This approval comes despite the country failing to meet two specific continuous performance criteria related to foreign payment arrears and import controls [4]. The funds bring the total amount disbursed under the Extended Fund Facility to approximately $2.4 billion [1].

Key takeaways

• The IMF approved a $695 million tranche, bringing total disbursements to $2.4 billion under the $3 billion Extended Fund Facility [1][3].
• Sri Lanka failed to meet two continuous performance criteria regarding new foreign payment arrears and the imposition of new import controls [4].
• The fund cited Cyclone Ditwah and the Middle East conflict as shocks that justify fiscal easing in 2026 [2][3].
• Economic growth is projected to slow to 3% in 2026 due to higher oil prices and reduced tourism earnings [2][3].

Program performance and missed targets

The IMF’s Executive Board completed the combined reviews under the 48-month arrangement, which was originally approved in March 2023 [3]. While the fund noted that Sri Lanka met all quantitative performance criteria for December 2025 and implemented most structural benchmarks, it confirmed that two continuous performance criteria were missed [4]. Specifically, the country failed to prevent the emergence of new foreign payment arrears and did not adhere to the requirement against imposing new import controls or tightening existing ones [4]. Despite these lapses, the IMF characterized the overall program performance as strong [3].

Economic outlook and external shocks

IMF Deputy Managing Director Kenji Okamura stated that the reform program has helped preserve economic resilience, allowing the government to respond to Cyclone Ditwah and the ongoing Middle East conflict [3]. However, the war has significantly worsened the economic outlook, with growth projected to slow to 3% in 2026 [2][3]. Okamura warned that higher oil prices could increase inflation and weaken the current account, further exacerbated by lower tourism receipts [1]. Consequently, the IMF deemed fiscal easing in 2026 appropriate to address these shocks, with plans to revert to a primary balance target of 2.3% of GDP starting in 2027 [1][3].

Why it matters

The approval provides immediate financial support as the country navigates external shocks and reconstruction efforts following Cyclone Ditwah [2]. While debt restructuring is nearing completion, the IMF cautioned that debt sustainability risks remain high [3]. Continued focus on revenue mobilization and structural reforms in public financial management and the electricity sector is still required to ensure long-term stability [3][4].