IMF flags downside risks for Sri Lanka despite resilient economy

The International Monetary Fund said Sri Lanka's economy continues to demonstrate resilience in the face of successive shocks, but warned that risks remain skewed to the downside. The assessment followed the conclusion of an IMF staff visit to the South Asian island nation.

Sri Lanka is working to recover from a severe economic crisis in 2022, which was triggered by an acute shortage of foreign currency. The country is supported by a $2.9 billion IMF programme.

The Fund's review comes as Sri Lanka seeks to sustain growth while containing elevated inflation, which has been driven by high energy prices since the Gulf conflict began seven months ago. The country imports all of its fuel and has struggled with rising energy costs.

To manage fuel use, authorities introduced rationing, sharply raised prices, and declared Wednesdays as public holidays starting in early March.

The IMF outlined key priorities for the country, including the development of a strong medium-term revenue strategy and administration, maintaining energy cost recovery, and executing capital investment. It also advised that keeping the 5 percent inflation target and the existing accountability band would be prudent, stressing that commitment to sound policies and reforms is critical to safeguarding macroeconomic stability.

"Shifting from stabilization to transformation requires sustained momentum on structural reforms to reduce poverty and lift living standards through strong and inclusive growth," the IMF said.

The Fund approved a $700 million double tranche for Sri Lanka under the programme in May to help bolster reserves, and has projected that the economy could grow by 3 percent this year.