(AFP / MANDEL NGAN)
Sri Lanka’s recovery from its worst economic crisis is threatened by war in the Middle East, the IMF warned on Thursday, the day after the payment of a $695 million aid tranche.
The severe economic reforms implemented since Sri Lanka’s payment default in 2022 have placed the country in a better position to face this new crisis, declared IMF mission chief Evan Papageorgiou in Washington.
“The war in the Middle East and the consequences of Cyclone Ditwah (in November) are weighing on the economy and have significantly increased the downside risks,” declared Mr. Papageorgiou.
The war-related surge in oil prices, launched by the United States and Israel on February 28, has strongly affected many Asian countries dependent on imports, including Sri Lanka.
The island obtained a rescue plan of $2.9 billion over four years at the start of 2023 after months of acute shortages the previous year, which had provoked street demonstrations leading to the fall of the president at the time, Gotabaya Rajapaksa.
The IMF program forced the island to increase taxes, cut subsidies and adopt strict anti-corruption laws in order to stabilize the economy and restructure its external debt.
Mr Papageorgiou said economic reforms have borne fruit and Sri Lanka is now in a much stronger position to weather the current crisis, but it must stay the course and “preserve its 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 in February.
At the same time, the country benefited last year from a “windfall” of customs revenue from vehicle imports, again authorized after a five-year ban, he added.
“Last year’s exceptionally high budget revenues are mainly explained by the significant windfall from customs duties and import taxes on vehicles, as well as by an under-utilization of certain investment expenditures,” declared Mr. Papageorgiou.
He urged the authorities to broaden the tax base and ensure a more representative revenue collection system.
The IMF forecasts Sri Lanka’s growth will slow this year to 3%, from 5% in 2025, while inflation is expected to remain within a target range of around 5%.
The IMF on Wednesday approved two stages of Sri Lanka’s loan program, making $695 million in additional loans immediately available.
This is the final tranche of the three-billion-dollar, four-year rescue plan granted to the country.
