Fourth IMF Review Completed – Sri Lanka Gains More Support.

• Title of the article: IMF Executive Board Completes the Fourth Review Under the Extended Fund Facility with Sri Lanka 

• Source: CBSL
• Date published: 03/07/2025
• Link to the original article:   press_20250703_completion_of_the_fourth_review_under_the_IMF_EFF_e.pdf

 

 What is international monetary fund?

      

International Monetary Fund (IMF)  is an intergovernmental financial institution that enhances the economic growth in the world, and ensures employment growth, international monetary cooperation, the global monetary stability, international trade and works to alleviate global poverty.

How Did the IMF Get Involved in Sri Lanka?

Over the past years, Sri Lanka had to go through one of the most severe economic crises ever in the country. This happened mainly due to the constant decline of foreign reserves in the country over the years. As a result, this led to a stagnation in international trade which affected domestic business operations. With the lack of foreign reserves, Sri Lanka announced to postpone their payment to international debt. In 2022, the total public debt level was around 120% of the nation’s GDP. Some side effects of this event are as follow.

• High inflation – Headline inflation was around 60% during the time. Prices of food, fuel and energy were off the charts.
• Depreciation of Foreign Exchange – The Sri Lankan Rupee was significantly depreciated against the USD, tightening international transactions.    
• Rise in Unemployment – Business operations were stalled, resulting labor cuts to minimize business operations

In a bid to come out of this predicament, Sri Lanka sought assistance of the IMF in 2022. In March 2023, a four-year IMF support program was approved, which is known as the Extended Fund Facility (EFF). The aim of the program is to assist in economic reform, sustainable debt financing and to facilitate price stability.

What is EFF?

EFF is an abbreviation of Extended Fund Facility. It is the kind of financial support that is issued by the IMF in aid of nations that are economically challenged. The EFF is intended to assist the countries which are in need of long term solutions to structural problems such as large debt, stagnant economic growth, inflation or imbalance of payment problems.

In the Sri Lankan case, the EFF program was commenced in March 2023, this is a 4 years agreement of USD 3 billion. It is concerned with:

·       Balancing of economy

·       Restructuring debt

·      Enhancement of financial discipline    

International Monetary Fund (IMF) has also finished the Fourth Review of the Extended Fund Facility (EFF) of 48 months by Sri Lanka and forthwith 254 million (about 350 million USD) is disbursed in Special Drawing Rights (SDRs). This fifth tranche brings Sri Lanka total amounts under the arrangement to SDR 1.27 billion (around USD 1.74 billion) and is the first since the start of the package in March 2023 to assist the country in its recovery and reform.

What is happening in Sri Lanka?

In general, the situation is moving in the right direction. The IMF has achieved most of the economic goals that it had projected. Inflation is under control and reserves are also increasing. Reforms in pricing of electricity were done. Almost restructuring of debt is completed. However, a small issue arose when incorrect data regarding overdue payments (arrears) was mistakenly provided to the IMF. Fortunately, this was not international but rather a result of miscommunication between government departments. The IMF trusted Sri Lankas version of the story and provided them with a waiver, meaning the  country  will not be penalized for the error.

What was proposed by the IMF?

This is what IMF would like Sri Lanka to do:

•  Collect more  money - enhance tax and eliminate unwarranted exemptions.
•  Help the poor in a better way- target and streamline the social programs.
•   Spend wisely , particularly on development projects.
•   Electricity pricing needs to be feasible - no more losses on the government.
•   Make the Central Bank independent (then inflation will remain low).
•   Complete debt agreements as soon as possible.
•  Enhance state of  government banks and development of the private sector.

 Personal view

After reading the IMF press release from July 3, 2025, I feel that Sri Lanka is finally making real progress. The approval of another USD 350 million under the EFF shows that reforms are working, even though challenges remain.

It’s encouraging to see improvements in areas like inflation control and tax revenue, as well as steps toward restructuring electricity pricing and public finances. I was slightly concerned about the incorrect data reported to the IMF, but I’m glad the government corrected it quickly and worked transparently.

To me, this program is more than just foreign funding .It’s about changing how we manage our economy. If we stay on track with reforms, support the poor, and complete debt restructuring, Sri Lanka has a strong chance of building a better, more stable future.

Written by, Pathum Dilhara (236088D)