IMF warns Middle East shock could hit Sri Lanka growth, backs targeted relief as tariffs rise

The International Monetary Fund has warned that escalating geopolitical tensions in the Middle East pose a significant risk to Sri Lanka’s economic recovery, even as authorities move ahead with price reforms and fiscal adjustments.

The IMF said the evolving crisis could impact key external sectors including exports, remittances, tourism and connectivity, describing it as one of the most significant external shocks faced by Sri Lanka since its economic crisis.

Officials said the duration and scale of the shock would be critical in determining the overall impact on growth, with uncertainty already complicating the Fund’s outlook.

Sri Lanka had previously seen growth expectations improve above earlier projections of around 2.9 percent, but the IMF indicated that forecasts are now under review as global conditions deteriorate.

Tariff hikes tied to cost recovery, with protection for vulnerable

The comments come as Sri Lanka implements a series of electricity and fuel price increases, part of broader efforts to restore cost-reflective pricing and reduce fiscal pressures.

Electricity tariffs were raised by an average 11 percent at end-March, with further revisions under consideration amid rising global fuel costs.

The IMF said such adjustments are necessary to prevent state-owned utilities from accumulating losses that could ultimately burden public finances.

“Ensuring that electricity prices reflect the true cost of supply is essential for fiscal sustainability,” officials said, noting that delays in cost recovery can create broader economic risks.

At the same time, the Fund stressed that targeted and temporary support is needed to protect low-income households, particularly those consuming electricity at lifeline levels.

Authorities have committed to cushioning vulnerable groups through relief measures, including a broader support package and social assistance top-ups.

Banking system stable despite isolated fraud case

On the financial sector, the IMF said a reported 13.2 billion rupee fraud at National Development Bank appeared to be contained within a specific operational area and does not pose systemic risk.

The Central Bank has assessed that the bank remains well-capitalised and liquid, with regulatory ratios above minimum requirements.

The Fund said it is monitoring the situation closely in coordination with regulators.

Reforms and prior actions key for next IMF tranche

The IMF also outlined the next steps under Sri Lanka’s programme, noting that several prior actions must be completed before the next review can be taken to the Executive Board.

These include progress on energy pricing, fuel cost recovery, and financing assurances, alongside continued fiscal reforms.

A Board decision could take place within weeks to a couple of months, depending on the pace of implementation, officials said.

Focus on fiscal risks, tax leakages and state enterprise reform

The Fund highlighted ongoing concerns around non-performing loans, revenue leakages and fiscal risks, pointing to the need for stronger tax administration and more transparent policies.

Officials said fiscal consolidation should focus on improving revenue collection and closing loopholes, rather than relying solely on higher taxes.

There were also calls to reform tax exemptions and strengthen oversight of state-owned enterprises, including SriLankan Airlines, where recent debt restructuring progress was welcomed.

Recovery faces a more complex phase

The IMF said Sri Lanka’s programme continues to benefit from broad stakeholder engagement, including discussions with political parties and parliamentarians on reforms ranging from fuel rationing to anti-corruption measures.

While the tone of discussions has been constructive, the Fund cautioned that the country’s recovery is entering a more challenging phase, with external shocks now playing a larger role.

Sri Lanka’s ability to sustain growth will depend on maintaining reform momentum while managing rising global uncertainty, the IMF said.