ECONOMYNEXT – The International Monetary Fund has urged that a budget be prepared in line with program parameters and warned that Trump tariffs are a risk to the economy which is recovering.
“While the economic outlook is positive, downside risks have increased on the back of potentially high tariffs on Sri Lanka’s exports, persistent trade policy uncertainty, and heightened geopolitical tensions,” Mission Chief Evan Papageorgiou said in a statement at the end of a staff visit.
“This underscores the critical importance of maintaining the reform momentum and the efforts to rebuild fiscal space and external buffers.
“These reforms will enhance Sri Lanka’s resilience to shocks and safeguard the hard-won economic progress to date. Should such shocks materialize, they will be addressed within the contours of the EFF program.”
READ FULL STATEMENT HERE : IMF Staff Concludes Visit to Sri Lanka
The mission came as Sri Lanka was beginning to prepare a budget for 2026. Under the IMF program Sri Lanka is expected to run a primary balance of 2.3 percent of gross domestic product.
“..[T]he 2026 budget should be underpinned by strong revenue measures and appropriate spending allocations, consistent with program parameters,” the statement said.
IMF urged Sri Lanka not to give sweeping tax holidays anymore. Sri Lanka had given 25-year tax holidays.
“Strengthening the tax exemption frameworks, boosting tax compliance, broadening the tax base, and enhancing public financial management, including to avoid the reemergence of expenditure arrears, are important,” the statement said.
“Upcoming bills on public-private partnerships, state-owned enterprises, public procurement, and public asset management should be consistent with the Public Financial Management Act and best practices.”
The IMF also urged prudent monetary policy.
“Monetary policy should remain prudent and prioritize price stability,” the statement said.
“Central bank independence should continue to be safeguarded, including by refraining from monetary financing of the budget.
“Continued reserve accumulation and exchange rate flexibility remain key priorities.”
The central bank has provided exceptional – almost East Asian style – monetary stability by missing and overperforming its 5 percent inflation target, broadly by operating deflationary policy.
Concerns have been raised that the central bank’s high inflation target of 5 percent does not amount to price stability as the agency had triggered currency crises in 2012, 2015, 2018 and 2020 without war under cover of the number.
In addition, concerns have also been raised by analysts over the macro-economists’ position that they can print money through open market operations – essentially refinancing private credit and imports – and that only financing the deficit is wrong.
As early as 1953, around the first currency crisis triggered by the newly set up central bank (10 people were shot in a public protest which led to the resignation of the prime minister as budget deficits were cut) more money was injected to banks including through a cut in the reserve ratio from 14 to 10 percent.
At the time however there was greater knowledge that open market operations were the problem.
The central bank had given “active support to the prices of government securities by open market operations,” the central bank said in its 1953 annual report.
“Maintainance of low interest rates, under conditions that no longer justified them, not only discouraged savings but also would have tended to encourage the liquidation of government securities,” the central bank said.
The central bank fixed the problem, which itself created, without going to the IMF, though social unrest was created. (Colombo/July25/2025)
