Sri Lanka’s strong collaboration in capacity development helped address economic crisis - Treasury Secretary

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Beyond financial assistance, Sri Lanka's strong collaboration in capacity development in public financial management and revenue administration, governance and institutional reform, social safety net expansion and targeting, fiscal transparency and digitalization, has helped the country to shape its policy responses, Treasury Secretary Mahinda Siriwardana said.

"These fundamental reforms were crucial to enable the country to address the root causes of the crisis, as opposed to simply remedying the symptoms of the crisis," Mr Siriwardana stated, speaking during the Capacity Development Forum of the International Monetary Fund (IMF) in Washington DC on Tuesday (22).

"The support of the IMF through the Extended Fund Facility, alongside our resolve to implement tough but necessary reforms, enabled us to make significant progress. In the past year alone, the economy grew by 5% after contracting in the previous two years by around 10%, inflation has come down from around 70% in September 2022 to near zero, and our gross official reserves now exceed USD 6 billion. For the past two years, we have also maintained a primary budget surplus—a clear sign of our commitment to reform," he further added.

"However, we fully recognize that this recovery is still fragile. Continued fiscal discipline, prudent macroeconomic management, and rebuilding both domestic and international confidence will be essential to ensure long-term stability."

The above reforms have helped to resolve immediate fiscal challenges, better equip the country to handle future crises and rebuild trust among the local and international partners, the Treasury Secretary stressed.

While it has been an extremely challenging journey since 2022, Sri Lanka has benefited from IMF’s sound policy advice, supported by several capacity building initiatives working closely with Sri Lankan officials, Mr Siriwardana observed. "The technical assistance (TA) missions, workshops, and resident expert engagements have helped us to strengthen governance, improve our legal frameworks, and enhance the management of public finances," he said.

"As part of its support, the IMF has so far provided around 200 technical assistance programs and training opportunities to Sri Lanka since 2021 and there were more than 80 missions related to fiscal and PFM matters.
One of the key strengths of IMF's approach was the seamless integration of technical assistance with the broader programmatic support under the Extended Fund Facility arrangement, which was approved in March 2023 to restore macroeconomic stability and debt sustainability."

From the fiscal perspective, the IMF’s CD initiatives mainly focused on enhancing Sri Lanka’s revenue mobilization efforts, public financial management systems, and debt management capacities. These reforms were crucial in stabilizing the economy and putting in place the foundation for sustainable growth, he explained.

The full discussion held with Mr Siriwardana can be viewed on the following link: https://www.imfconnect.org/content/imf/en/annual-meetings/calendar/open/2025/04/22/195256.html#

The complete transcript of the Question and Answer session with the Treasury Secretary can be seen below:

01. Could you share insights on Sri Lanka's severe economic crisis and the capacity development needs to rebuild trust in government and the economy.

Thank you for the opportunity to speak with you today, and for your continued partnership during one of the most challenging periods in Sri Lanka’s history.

I was appointed as Finance Secretary in April 2022, at a time when Sri Lanka was navigating through the unprecedented, deeply complex and most severe economic crisis since independence in 1948.

Sri Lanka’s economic crisis was the outcome of long-standing weaknesses in the macroeconomic structure being exposed by a series of domestic and exogenous shocks, exacerbated by a series of grave missteps in domestic policies. The long-standing weaknesses include a chronically low revenue-to-GDP ratio leading to chronic fiscal deficits as well as current account deficits, leading to a steady accumulation of public debt, and particularly external debt to finance external imbalances. A long-standing sovereign-bank-SOE nexus had also developed, creating complex inter-linkages, including cross-holdings of debt between these connected entities.

The sovereign credit ratings were downgraded, the country lost capital market access, and continued to service debt amidst dwindling FX reserves. Eventually, the usable forex reserves dropped to a near zero level by early April 2022. As a result, essential goods became scarce and there were 13-hour long power shortages and the country experienced a sovereign default for the first time in its history. Meanwhile, inflation spiraled peaking at around 70%, poverty rates doubled and investor confidence was lost.

In parallel, the trust in government, public institutions, governance and economic management was being severely eroded, with widespread public protests, reflecting deep social and economic distress.

In this context, our immediate priorities were clear: establish macroeconomic stability, restore public trust, and lay the groundwork for sustainable recovery. Restoring the trust was essential for both short-term recovery and long-term sustainable growth.

The IMF’s technical assistance and policy advice helped design and implement a comprehensive reform program addressing not just fiscal issues, but monetary & financial, governance and institutional challenges as well.

We initiated a comprehensive reform program anchored in debt restructuring, revenue-based fiscal consolidation, and institutional strengthening. We also prioritized building a resilient social protection system to shield vulnerable populations.

Beyond financial assistance, our strong collaboration in capacity development in public financial management and revenue administration, governance and institutional reform, social safety net expansion and targeting, fiscal transparency and digitalization, has helped us to shape our policy responses.

These fundamental reforms were crucial to enable the country to address the root causes of the crisis, as opposed to simply remedying the symptoms of the crisis.

The support of the IMF through the Extended Fund Facility, alongside our resolve to implement tough but necessary reforms, enabled us to make significant progress. In the past year alone, the economy grew by 5% after contracting in the previous two years by around 10%, inflation has come down from around 70% in September 2022 to near zero, and our gross official reserves now exceed USD 6 billion. For the past two years, we have also maintained a primary budget surplus—a clear sign of our commitment to reform.

However, we fully recognize that this recovery is still fragile. Continued fiscal discipline, prudent macroeconomic management, and rebuilding both domestic and international confidence will be essential to ensure long-term stability.

The above reforms have helped to resolve immediate fiscal challenges, better equip the country to handle future crises and rebuild trust among the local and international partners.

02. How were IMF's capacity development initiatives particularly useful to help the country progress and build the country capacities to achieve its objectives?

It has been an extremely challenging journey since 2022, but we have benefited from IMF’s sound policy advice, supported by several capacity building initiatives working closely with our officials. The technical assistance (TA) missions, workshops, and resident expert engagements have helped us to strengthen governance, improve our legal frameworks, and enhance the management of public finances.

As part of its support, the IMF has so far provided around 200 technical assistance programs and training opportunities to Sri Lanka since 2021 and there were more than 80 missions related to fiscal and PFM matters.

One of the key strengths of IMF's approach was the seamless integration of technical assistance with the broader programmatic support under the Extended Fund Facility arrangement, which was approved in March 2023 to restore macroeconomic stability and debt sustainability.

Peter mentioned the tax policy reform technical assistance mission. That mission was on the ground in Colombo within a month of the commencement of formal programme negotiations, highlighting the rapid mobilization of TA resources in response to the urgency of Sri Lanka’s context. The analytical work that resulted from the TA mission led to the overall tax policy path that underpinned Sri Lanka’s revenue based fiscal consolidation process which was the bedrock of the overall macroeconomic reforms that were required for Sri Lanka’s recovery.

Alongside tax reform, the IMF supported significant strides in Public Financial Management (PFM). In fact, the PFM reform was one of the most important fiscal reforms implemented in the last several decades. It encompasses a vast body of work, addressing several areas which were hitherto dispersed under several different laws and regulations. This fragmented legal framework has been one of the reasons for Sri Lanka’s weak fiscal management over several decades. IMF TA played an important role in sharing with the Sri Lankan authorities the global best practices, learnings, and technical aspects required to make this a success.

Similarly, debt management reform entailed significant changes in the institutional framework and introduction of new legislation. In the past, the debt management function was handled by three institutions, housed between the central bank and the Ministry of Finance. There was no composite legal framework for debt management, including the development of medium-term debt management strategy and other basic requirements. Here again, IMF TA was instrumental in supporting the efforts of Sri Lankan authorities to design and implement a complex institutional and legislative reform of the debt management process in Sri Lanka.

The IMF's CD initiatives fostered a spirit of collaboration, helping to strengthen the partnership between Sri Lanka's authorities and development partners. The collaborative approach followed ensured that the reforms were embedded in the local context as well, fostering greater sustainability in the long run.

03. What brief advice would you give to other countries aiming to build institutional and human capacity during similar economic transformations?

While I hesitate to offer advice, as we are still on our journey of recovery and reform, I can share a few reflections based on our experience in Sri Lanka—one shaped by difficult decisions, steep learning curves, and invaluable partnerships.

1. Act early and act comprehensively. Do not take half-hearted measures since these are less likely to produce results and more likely to be reversed in the future. It is critical to develop a clear vision and to prioritize reforms that address the root causes of the economic problems, whilst being flexible to adapt to a dynamic, and volatile operating environment.

2. Asking for support early is a strength, not a weakness. Sri Lanka had to implement comprehensive reforms across the spectrum of macroeconomic policy, and the institutional capacity was stretched to the maximum. Timely collaboration with international financial institutions like the IMF not only brings critical financial support, but also access to global expertise, tools, and technical assistance that are invaluable during moments of crisis and beyond. Capacity development should go hand in hand with fiscal and economic reform. It is not a side task but a core component of the process.

3. Sri Lanka had to implement painful reforms at a time when households and business were already under severe strain due to the crisis. It is essential to make every effort to protect the poor and vulnerable through targeted social protection. Do that without compromising other policy objectives such as tax policy and SOE management.

4. Communicate well with all stakeholders and make every effort to build political consensus in a bi-partisan manner. Transparent, two-way communication with the public helps to rebuild trust and garner support for reforms.

Finally, economic reforms are complex and require careful planning, sustained efforts and broad support. Fostering partnerships have been very productive for us. There were many challenges along the way and our resolve and determination were tested on multiple occasions, but one must persevere to succeed.