• Altering IMF goals risks losing key foreign financing, warns Dushni Weerakoon
• 2028 debt repayments loom, raising concerns over dollar reserves
• Balancing recovery with IMF commitments is important to avoiding another crisis

Sri Lanka may need to reconsider its strict adherence to the IMF’s fiscal targets as it currently goes through a fragile recovery from the 2022 economic crisis, according to Institute of Policy Studies (IPS) Executive Director Dushni Weerakoon.

Speaking at the release of the ‘State of the Economy’ report on Monday (8), Weerakoon outlined the difficult choices facing policy makers as they balance the need for economic relief with the risks of deviating from the IMF’s fiscal framework.

She explained the potential trade-offs of altering the IMF’s strict timelines and fiscal targets.

“If we materially alter IMF targets and timelines, we risk losing access to multilateral financing from institutions like the ADB and World Bank,” she said. This would pose notable risks to Sri Lanka’s ability to secure much-needed foreign currency inflows, important for sustaining the recovery.

While the IMF itself provides limited financial support, its backing is key to unlocking broader international aid, as she explained. Deviating from the programme could result in delayed reviews, which in turn could dry up financial assistance from other multilateral institutions and official creditors.

Weerakoon stressed that “bilateral official creditors take great comfort from knowing that Sri Lanka is sticking to its IMF commitments before they consider fresh sources of funding.”

Another concern raised by Weerakoon was the impact that altering fiscal policy could have on debt sustainability. While Sri Lanka has concluded debt restructuring negotiations, the moratorium on repayments only lasts until 2027.

After that, the country must begin repaying its obligations, necessitating the accumulation of dollar reserves.

“If we come to 2028 and don’t have the dollars to start repaying, we are back again to not being able to service our debt obligations,” she warned.

The challenges of negotiating more favourable debt terms, such as bigger haircuts, were also discussed. Weerakoon highlighted that prolonging these negotiations could slow down the country’s recovery, as has been evidenced in other nations that have defaulted.

Furthermore, initiatives like debt forgiveness are unlikely to materialise quickly, as there is no global framework in place and bilateral creditors are reluctant to entertain such proposals.

“For a middle-income country like Sri Lanka, it’s going to be far more difficult to even start work in these areas,” she added.

Despite the risks, she acknowledged the temptation for policymakers to accelerate the recovery process through more flexible fiscal policies. The ongoing debate is whether to substantially revise tax and spending policies or make smaller adjustments that align with the IMF’s programme.

She added that these decisions will shape the country’s ability to rebuild its economy and avoid falling back into crisis conditions.

Sri Lanka’s slow recovery has already led to weaker job growth, lower living standards, and persistent poverty. According to Weerakoon, “there is slower job growth, lower living standards, and higher levels of poverty,” which makes finding the right policy tools to boost recovery all the more urgent.