SL’s economic stability hinges on IMF-backed fiscal reforms
The Sri Lankan government must adhere to the International Monetary Fund’s (IMF) Extended Fund Facility conditions until 2028 to ensure prudent fiscal management for the 2025 budget, according to Minister of Transport, Highways, and Mass Media, Dr. Bandula Gunawardana.
Regardless of the governing administration, securing the necessary foreign funding to address the external resource gap is critical, with an estimated US $5018 billion required for international transactions by 2025.
To bridge this gap, the IMF has agreed to provide $663 million under an extended credit facility, along with an additional $700 million to bridge the 2025 budget deficit.
The World Bank (WB) and the Asian Development Bank (ADB) have pledged $400 million and $300 million, respectively. Furthermore, $3,655 million in debt relief is anticipated for next year’s budget, crucial for covering public servant salaries, pensions, and subsidies.
Despite efforts to minimise budget deficits, a shortfall of $3,911 million is projected by 2027. To prepare the budget for that year, $629 million will be allocated, in addition to $600 million from the IMF, $300 million from the WB and $300 million from the ADB. However, an additional $1.5 billion will be needed, requiring access to the international market.
Given the global market conditions, Sri Lanka’s sovereign bonds can only be issued in 2027, provided foreign reserves reach $14 billion, a significant increase from the current $5.5 billion.
A structured annual programme has been developed to address these financial challenges, emphasising that no government can operate outside this economic framework without risking a collapse, Dr. Gunawardena said.
The 2025 budget, set to be drafted in the coming months, is critical for disbursing salaries, pensions, and social welfare benefits. Without IMF support, a budget cannot be prepared beyond 2027. Sri Lanka’s economy has stabilised following the 2022 crisis, largely due to disciplined fiscal practices and adherence to the IMF’s structural benchmarks.
Since 1965, Sri Lanka has signed 16 agreements with the IMF, with seven terminated early. Out of the 51 structural benchmarks in the current IMF programme, Sri Lanka met 27 by June’s second review this year.
The government has also enacted 75 new laws in the past two years, creating the most updated legal framework in South Asia. These include the Central Bank Act, Economic Transformation Act, the Public Debt Management Act, Fiscal Management Act and the Anti-Corruption Law.
Any political party hoping to come into power should divulge to the public as to whether they are adhering to these legislations, amend or abolish it, he stressed.
The IMF programme, which began on September 1, 2023, has disbursed three tranches totalling around $1 billion. Dr. Gunawardena emphasised that the country must continue with the IMF-backed reforms to secure international support for its budgetary processes. Any deviation could lead to a withdrawal of debt relief, forcing the government to repay $6 billion annually.
Following the unprecedented economic crisis of 2022, the government implemented a coordinated macroeconomic reform programme, converting a primary budget deficit of 5.7 per cent of GDP in 2021 into a surplus of 0.6 per cent in 2023.
Government revenue is increasing, and money printing has ceased since September 2023. Despite these achievements, continued fiscal discipline is essential to maintaining economic stability and preventing a rapid downturn, he pointed out.
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