Sri Lanka must undertake “deep and sustained” structural reforms to escape its long-standing middle-income trap and transition into an upper-middle-income economy, International Monetary Fund Mission Chief Evan Papageorgiou said, as the Fund’s combined fifth and sixth reviews under the Extended Fund Facility were finalised.
Speaking in response to a question on Sri Lanka’s long-term trajectory, Papageorgiou said the challenge “extends far beyond short-term recovery” and requires a fundamental transformation of the country’s economic structure. “Lifting the country’s growth potential and moving toward upper-middle-income status requires deep structural reforms that address productivity and investment,” he said.
He flagged the business environment, foreign direct investment, economic diversification, governance, electricity sector modernisation and infrastructure as the priority reform areas. FDI inflows remain “relatively low” and constrain technology transfer, innovation and job creation, the Mission Chief said. The export base, still heavily reliant on textiles and agriculture, must shift to higher-value industries supported by skills and innovation.
The framing landed alongside the broader IMF country report published after the combined fifth and sixth review approval, which released a US$695 million tranche and brought total disbursements since the 2022 default to US$2.4 billion. The Fund cut its 2026 growth forecast to 3.0 percent from a 5.0 percent outturn last year, citing the Middle East conflict and Cyclone Ditwah reconstruction needs as twin shocks.
EconomyNext, in a detailed analysis of the report, noted that Sri Lanka’s fuel import bill jumped to US$886 million in April from US$152 million in December, tourism revenue plunged 38.8 percent year on year, and the current account flipped into a projected 0.5 percent of GDP deficit after eighteen months of recovery. The Fund allowed the central government deficit to widen to 5.1 percent of GDP, with the primary surplus target scaled back to 1.4 percent from 5.4 percent.
The board also granted a Waiver of Non-Observance after the US$2.5 million cyber theft from the External Resources Department’s email system caused Sri Lanka to technically miss a sovereign debt deadline. The Fund treated the breach as an isolated operational error.
Papageorgiou earlier signalled that debt sustainability risks remain elevated but trajectory is improving, with the Central Bank’s recent 100-basis-point hike described as “broadly appropriate”.
Sources: EconomyNext, NewsFirst.
