The International Monetary Fund published a staff statement after a visit to Colombo, saying the Middle East war has weighed on Sri Lanka’s economy and that sustained implementation of the reform program under the Extended Fund Facility is critical to protect the recovery and preserve fiscal and external sustainability. The statement pointed to inflation rising from 1.6% year on year in February 2026 to 5.5% in May after energy price increases, softer growth in tourist arrivals and slower reserve accumulation. The update said the Central Bank of Sri Lanka responded with a 100-basis-point policy rate increase and macroprudential measures, while the government introduced a temporary on-budget relief package including fuel, electricity and fertilizer subsidies and cash transfers for vulnerable households. The IMF said the authorities should return to the primary balance target of 2.3% of GDP in 2027 after fiscal easing in 2026, continue work on tax compliance, tax base broadening and public financial management, avoid a reemergence of expenditure arrears, and resolve spending execution bottlenecks including for post-cyclone recovery. It also called for faster state-owned enterprise reform, continued cost-recovery energy pricing, stronger targeting of social safety nets, quicker capacity building at the Public Debt Management Office as debt restructuring nears completion, prudent and data-dependent monetary policy, exchange rate flexibility with foreign exchange intervention limited to excessive volatility, the phasing out of balance of payments restrictions, and stronger operational risk, cybersecurity and AML/CFT safeguards. Sri Lanka’s program performance will be formally assessed in the Seventh Review of the EFF, with mission dates to be announced later.
International Monetary Fund2026-06-30
International Monetary Fund says conflict pressures Sri Lanka and calls for continued reforms ahead of Seventh EFF review
The International Monetary Fund said the Middle East war has weakened Sri Lanka’s economy, with inflation rising to 5.5% in May, tourism growth softening and reserve accumulation slowing. After a visit to Colombo, it called for continued fiscal, monetary and structural reforms under the Extended Fund Facility, including a return to a 2.3% of GDP primary surplus target in 2027. Sri Lanka’s performance will next be assessed in the Seventh EFF review.