International Monetary Fund Mission Chief for Sri Lanka Evan Papageorgiou said debt sustainability risks remain elevated but the country’s overall trajectory is moving in a positive direction, in a post-board statement two days after the Executive Board cleared the combined fifth and sixth EFF reviews.

“Debt had been quite high in Sri Lanka from the beginning of the program,” Papageorgiou said, conceding that sustainability has been a recurring concern. He said the Fund’s baseline still flags elevated risks in its latest staff report but the overall burden is on a declining path under current policy assumptions, supported by fiscal discipline, growth and controlled inflation.

He pointed to the comprehensive debt restructuring “now nearing completion” as the main shift since the programme began in 2023. Maintaining a primary fiscal surplus, he said, remains essential to keeping the debt path downward over the medium term.

Papageorgiou said Sri Lanka is in a “much stronger position” than at the height of the 2022 collapse, citing rebuilt macroeconomic buffers and what he described as authorities’ willingness to act decisively. He warned, however, that the Middle East conflict and the aftermath of Cyclone Ditwah have tilted risks “firmly to the downside” and confirmed the Fund’s growth projection has been cut to around 3 percent in real terms for 2026.

Rising global oil prices are expected to lift inflation and strain the external position, while tourism could face further setbacks. He described the authorities’ temporary fiscal easing for 2026 — including cyclone-related reconstruction spending — as appropriate but stressed the importance of returning to the targeted 2.3 percent primary surplus from 2027.

He flagged revenue mobilisation, public financial management reforms, public investment efficiency, electricity sector restructuring and greater exchange rate flexibility as priorities to rebuild external buffers.

Papageorgiou separately ruled out a return to broad-based import controls, even with external pressure mounting from the Middle East shock. “In general, we advise against broad-based import restrictions for stabilizing the economy,” he said, calling Sri Lanka’s reversal of the vehicle import ban last year “an important step” that revived activity and lifted government revenue. He said the rupee’s depreciation reflected fundamentals and should be allowed to work, and reiterated that the IMF is engaged with authorities on managing the external shocks without distortion.

On monetary policy, The Island reported the mission chief described the current stance as “broadly appropriate” despite the Central Bank’s recent 100-basis point policy rate hike, and said the Fund expected inflation to remain broadly aligned with the CBSL’s 5 percent target. “Now, with prices stabilised and foreign reserves continuing to grow as we have in the projection, we do not see any evidence of destabilising monetary expansion,” he said, adding that the Central Bank was no longer financing the fiscal deficit by printing money — a change he flagged as one of the central reforms under the EFF programme.

Sources: NewsFirst — debt risks, NewsFirst — reform course, NewsFirst — no return to import restrictions, The Island — exchange rate.