Sri Lanka’s recovery from its worst economic meltdown is under threat from the effects of the Middle East war, the International Monetary Fund said Thursday, a day after granting a $695-million bailout installment.
Tough economic reforms since Sri Lanka’s sovereign default in 2022 have placed the country in a better position, IMF mission chief Evan Papageorgiou told a news conference in Washington.
But the Iran war as well as the aftermath of Cyclone Ditwah, which struck in November, “are weighing on the economy and have tilted the risks firmly to the downside,” Papageorgiou said.
Surging oil prices due to the war, launched by the United States and Israel on February 28, have heavily impacted many import-dependent Asian countries including Sri Lanka.
The island secured a $2.9-billion, four-year bailout in early 2023 after months of acute shortages in the previous year led to street protests that toppled then-president Gotabaya Rajapaksa.
The IMF’s board approved on Wednesday two reviews of Sri Lanka’s loan program, making $695 million in additional loans immediately available.
The IMF program has forced the island to raise taxes, cut subsidies and introduce tough anti-corruption laws to stabilize the economy and restructure external debt.
Papageorgiou said economic reforms had paid off and Sri Lanka was in a much stronger position to deal with the current crisis, but must hold the course and “safeguard the hard-won gains.”
The island was recovering from the November cyclone, which killed 643 people and caused an estimated $4.1 billion in infrastructure damage, when the Middle East conflict erupted.
At the same time, Sri Lanka last year had a “windfall” of customs duty from vehicle imports, which were allowed after a five-year ban, Papageorgiou said.
“Strong overperformance in fiscal revenue last year was primarily due to the very large windfall from motor vehicle duties and import taxes, and some underspending in capital expenditure,” he added.
The IMF official urged the authorities to broaden the tax net and ensure a more representative revenue collection system.
The IMF expects Sri Lanka’s growth this year to slow to 3.0 percent, down from 5.0 percent in 2025, with inflation remaining within a target range of about 5.0 percent.
