ECONOMYNEXT – An International Monetary Fund mission is in Sri Lanka conducting a fifth review of its Extended Fund Facility (EFF) program, and the economy is recovering and taxes are improving, an official said.
“…[W]hat I can say with respect to the timing of the next review is that we do have a mission on the ground now in Sri Lanka to conduct the Fifth Review of the EFF,” Julie Kozack, Director, Communications Department told reporters in Washington.
“Given that the team is now currently in discussions with the authorities, I won’t say more other than to say that, of course, the team will communicate at the end of the mission.”
Sri Lanka’s program is achieving “impressive progress”, she said, with revenue collections up and inflation low.
“There has been a post-crisis rebound in growth to 5 percent in 2024, which is a remarkable achievement,” she said.
“The revenue-to-GDP ratio in the budget improved to 13.5 percent of GDP from 8.2 percent in 2022, which is also a significant increase, although still work to be done.
“The debt restructuring process is nearly complete. Program performance overall is generally very strong, and the government remains committed to the program’s objectives.”
Sri Lanka defaulted on its external debt after several years of aggressive inflationary open market operations to target potential output (a statistical calculation based on past performance) and flexible inflation targeting (a statistical framework that assumes low historical inflation shown by an index allows rates to be cut in the present – usually with inflationary open market operations as credit recovers).
Targeting inflation – at a very high rate – without a clean float led to a series of back-to-back currency crises and a frenzy of foreign borrowings to repay maturing debt amid forex shortages and eventual sovereign default under the most aggressive policy to target potential output.
But the heavy weight of inflation has now been taken away from the shoulders of hardworking families, planning projects is easier as the central bank missed its inflation target and returned to pre-1978 inflation levels close to the US and Western Europe.
Higher growth – possibly above the potential output econometric – shows that growth is an outcome of human action and not statistics, analysts say.
However a return to inflation to target, may result in fresh social unrest and a post-war style currency crisis analysts have warned. In Kenya there were street riots at the seventh review of a program.
The central bank however has paused aggressive open market operations after a public outcry in late 2024, reinstating the scarce reserve regime that existed from September 2022 to around August 2024, but whether printing money for a ‘single policy rate’ will resume is not known.
Encouragingly bank interest rates have gone up slightly in recent months, which may help maintain reserve collections and avoid lending without deposits and allow reserves to be collected. In August the central bank bought 142 million dollars from banks which is higher than in July.
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Backed by inflationary open market operations, it has been easier to mis-direct banks and promote mal-investments in the recent past through a bureaucratic ‘transmission mechanism’, analysts have said.
The attempts by macro-economist to mis-direct the credit system through the ‘transmission mechanism’ was so bad in post-war Sri Lanka (leading to a so-called ramrod rate anomaly) that Treasury bill yields which were used as the benchmark to price private securities was jettisoned in favour of the average weighted deposit rate.
The eventual correction in rates – backed by trade and exchange controls – to stop external troubles then leads to bad loans in banks in a stabilization crisis.
Sri Lanka however does not have free trade – partly due to frequent forex shortages from flawed central bank operating frameworks – and also has draconian food taxes to protect domestic producers. (Colombo/Oct03/2025)