Stresses stressing the need to strengthen tax compliance and remove exemptions
Emphasizes urgent need to restore cost-recovery electricity pricing
Social support best suited to promote inclusive growth in tight fiscal space, says need to be well-targeted to individuals
Commitment to the IMF is the best path to Sri Lanka’s economic sustainability, says IMF
Next IMF mission expected to arrive in Sri Lanka in coming weeks
Following the successful completion of the third review under the Extended Fund Facility (EFF) program, the International Monetary Fund (IMF) will closely monitor Sri Lanka’s fiscal and structural adjustment before the fourth review.

Last Friday, the IMF approved the third review, allowing Sri Lanka to access US$334 million, bringing the total under the program to US$1.34 billion. However, the Fund has warned that further announcements are crucial to sustain the economic recovery.

In a virtual press conference, the IMF highlighted the need to strengthen compliance and eliminate exemptions for tax payments to maintain fiscal discipline.

To achieve the 2025 tax revenue target of 13.9 percent of GDP, Sri Lanka needs to generate an additional 1.6 percent of GDP in revenue. The IMF has indicated that this gain is necessary to counter tax concessions, the elimination of the Imputed Rental Income Tax (IRIT) and under-compliance with VAT.

The Fund has also warned of the growing government financial risks of development entrepreneurs, while underscoring the urgent need to restore efficiency-recovering electricity pricing.

“In the context of tariff reform, it is important to ensure that tariffs are re-designed to recover costs,” emphasized Peter Breuer, IMF Senior Mission Chief for Sri Lanka.

In addition, the IMF stressed the importance of meeting social spending targets and continuing to expand the social safety net to protect the most vulnerable.

“Going forward, we need to target those who are already in a position to promote inclusive growth with a fiscal space,”

The focus of the fourth Sri Lanka review will be on ensuring that the final product is delivered in the final Sri Lankan version, which is due to be adopted.

“This is something we are doing very carefully,” he added.

Despite the challenges, Brewer acknowledged Sri Lanka’s progress, noting that the country is already “only half of the way through the program,” which he described as “very good.”

Releasing the economic crisis in June 2022, which was marked by severe shortages of fuel, food and manufacturing, he compared it to the current recovery, which has seen a growth rate of 5.5%.

“Since then, in the short time that the program has been in place, primarily since 2023, it has already recovered 40 percent of the revenue lost in the previous five years

“In a short period of time, Sri Lanka has seen a very significant recovery – the annual growth rate is 5.5%. I think Sri Lanka is turning things around. I am quite optimistic,” he said.

Brier stressed that Sri Lanka’s best path to economic sustainability is to remain committed to the approach.

“This is the final version that is still needed, 1.5% of GDP. But all the hard adjustments have already been made in the last two years,” he said.

The IMF’s next mission is due to arrive in Sri Lanka in the next few weeks.