After the IMF: Can Sri Lanka Make Economic Discipline Its Own?
From stabilization to transformation — the real test begins when the IMF programme ends
“The difficulty lies not so much in developing new ideas as in escaping from old ones.”
— John Maynard Keynes
By Prof. Asoka.S.Seneviratne
Introduction
Sri Lanka has travelled a considerable distance from the economic catastrophe of 2022. Growth has returned, inflation has been brought under control for much of the period, foreign-exchange reserves have recovered, the banking system has strengthened, and debt restructuring is largely complete. The latest IMF assessment in September 2026 confirms this progress.
Yet the conclusion of the IMF’s September mission without a Staff-Level Agreement raises a more important question than whether the Seventh Review will eventually be completed.
Sri Lanka’s current Extended Fund Facility expires in March 2027. The Government has indicated that it intends to complete the present programme and does not currently envisage another IMF programme. If so, the central challenge is no longer merely stabilisation under an externally supported framework. It is whether Sri Lanka can make the discipline of (i) sound fiscal, (ii) monetary, (iii) governance and (iv) external-sector policies its own.
As per my understanding, the transition from stabilisation to transformation therefore requires more than satisfying IMF targets. It requires (i) a credible strategy for raising productivity, (ii) investment, (iii) exports, (iv) employment and (v) real living standards while preserving fiscal and monetary stability. The 2027 Budget could become the critical bridge between these two phases.
A pending agreement should not be mistaken for failure
The IMF mission led by Mission Chief Evan Papageorgiou visited Sri Lanka from 10 to 23 September to discuss the Seventh Review of the Extended Fund Facility and the 2026 Article IV Consultation.
The mission ended without a Staff-Level Agreement. But that fact needs to be interpreted carefully.
The IMF did not say that negotiations had failed. It said discussions had been productive and would continue towards agreement on the parameters and policies required to conclude the Seventh Review.
This distinction matters.
The absence of an immediate agreement is therefore not, by itself, evidence that Sri Lanka’s economic programme is going off course. Indeed, the IMF’s assessment recognises considerable progress.
But it does provide an opportunity to ask a larger question.
What remains to be done before Sri Lanka can move confidently from IMF-supported stabilisation to nationally owned economic transformation?
That, rather than the pending agreement itself, is the issue that deserves public attention.
Stabilisation is real — but stabilisation is not transformation
The IMF’s latest assessment contains encouraging evidence.
Economic activity expanded by 4.2% in the second quarter of 2026, marking 11 consecutive quarters of growth. Gross official reserves reached US$6.9 billion at the end of August. Banks remained well capitalised and profitable, while fiscal performance during the first half of 2026 was strong. Debt restructuring was also largely completed.
These are not insignificant achievements.
Sri Lanka has demonstrated an ability to recover from the extraordinary economic disruption of 2022 and to absorb subsequent shocks.
But there is an important distinction between resilience and transformation. Resilience means that the economy can withstand shocks without collapsing. This point must be understood in depth by all.
Transformation means that the underlying productive capacity of the economy is changing —(i) through higher productivity, (ii) stronger exports, (iii) better investment, (iv) improved institutions, (v) technological advancement, (vi) better human capital, and (vii) rising incomes. The above points too must be understood in depth by all in the right direction.
Sri Lanka must therefore avoid confusing the restoration of stability with the completion of economic reform.
The former is the foundation.
The latter is the objective.
What are the downside risks?
The IMF has warned that risks remain tilted towards the downside.
Three external risks are particularly important: (i) the continuing uncertainty surrounding the Middle East conflict, (ii) global trade-policy uncertainty and (iii) the effects of El Niño.
For Sri Lanka, these are not remote international events.
The country remains heavily dependent on imported energy. A sustained increase in international oil prices can raise the import bill, increase inflationary pressure, and affect the current account.
A deterioration in global trade can affect export demand and foreign-exchange earnings. Weakness in global economic activity can also affect tourism and remittances.
Climate shocks create another dimension. El Niño-related disruptions can affect agriculture, food prices, energy, and public expenditure.
The lesson is clear.
A country cannot eliminate external shocks. It can only build sufficient economic buffers to absorb them.
That requires (i) fiscal space, (ii) adequate foreign-exchange reserves, (iii) credible monetary policy, (iv) a resilient financial system, and (v) institutions capable of responding quickly. The recently established National Business Facilitation Center (NBFC) is, among many, at the heart or anchor of those institutions for many reasons.
This is why the IMF continues to emphasise fiscal and external buffers rather than simply headline economic growth. This means that Growth alone does not necessarily mean that an economy has become financially stronger or more resilient. What matters is whether (i) growth is supported by sustainable public finances,(ii) adequate foreign-exchange reserves, and (iii) a capacity to withstand future shocks. In other words, the quality and sustainability of growth matter as much as the growth rate itself.
The revenue question: who will finance Sri Lanka’s future?
Among the IMF’s recommendations, the development of a medium-term revenue strategy deserves particular attention.
This is not simply a demand for higher taxation. It is a demand for a tax system capable of financing the State sustainably over several years.
Sri Lanka needs to answer fundamental questions. How broad should the tax base be?
How should tax exemptions and incentives be designed? How can tax evasion be reduced?
How can compliance be improved? How can revenue be increased without placing a disproportionate burden on productive investment and vulnerable households?
These are questions of economic design, not merely tax collection.
A country that repeatedly spends more than it can sustainably finance eventually faces a familiar choice: borrow more, reduce expenditure, or increase taxation.
None is painless.
The objective of a medium-term revenue strategy should therefore be to establish a predictable and fair fiscal foundation before the next crisis forces another emergency adjustment.
This is particularly important after March 2027.
My emphasis is that if the IMF program ends, the arithmetic of government finance does not end with it.
Cost recovery and the cost of living: the difficult balance
The IMF has also stressed the importance of maintaining cost-recovery energy pricing.
The economic logic is straightforward.
If State-owned energy enterprises sell electricity or fuel below sustainable cost for prolonged periods, somebody ultimately carries the loss — the taxpayer, the enterprise itself, its creditors or, indirectly, the wider economy.
Persistent losses can become a hidden fiscal liability.
But there is another side to this equation.
Energy is not an ordinary commodity for households. Electricity and fuel costs affect transport, food production, manufacturing, and virtually every family.
Therefore, the policy challenge is not simply whether energy prices should recover their costs.
The deeper question is:
How can Sri Lanka maintain financially sustainable energy enterprises while protecting vulnerable households from excessive increases in the cost of living?
That requires targeted social protection rather than economically unsustainable universal subsidies.
Macroeconomic stability is valuable only when it ultimately improves the lives of citizens via inclusive Economic Growth.
From stabilization to transformation
This is perhaps the most important sentence in the IMF’s latest statement:
“Shifting from stabilization to transformation requires sustained momentum on structural reforms.”
Structural reform means changing the way the economy actually works.
It includes (i) creating a more enabling business environment (i.e NBFC), (ii) liberalising trade where appropriate, (iii) modernising business and labour regulations, (iv) broadening access to finance and (v) advancing digitalisation.
But these reforms should not be understood as an IMF checklist.
They should be understood as part of Sri Lanka’s own development strategy.
The country (i) needs to move towards an economy that produces more competitive goods and services, (ii) attracts productive investment, (iii) creates quality employment, (iv) earns foreign exchange and (v) raises productivity.
The question is therefore not simply:
“Has Sri Lanka completed the IMF reforms?”
The more important question is:
“Have the reforms changed the productive capacity of the Sri Lankan economy?”
That is the transformation test that must be understood well.
The 2027 Budget: from compliance to transformation
This is where the 2027 Budget becomes exceptionally important.
The 2027 Budget should not be viewed merely as another annual exercise in meeting fiscal targets.
It could become the bridge between the stabilisation phase and the transformation phase.
The central question should be:
What should Sri Lanka do with the fiscal space created by stabilisation?
Capital expenditure must be directed towards projects that raise future productive capacity.
Infrastructure should reduce the cost of doing business.
Digitalisation should improve public-sector efficiency.
Skills development should address the requirements of a changing economy.
Agriculture should move towards higher productivity and value addition.
Tourism should generate greater domestic value.
Renewable energy should strengthen energy security.
Export industries should become more competitive.
Investment procedures should become faster and more predictable.
In other words, the Budget should be judged not only by how much it spends, but by what additional productive capacity that spending creates.
That is the difference between expenditure and transformation.
Inflation credibility and the role of the Central Bank
The IMF has also advised Sri Lanka to maintain its 5% inflation target and the existing accountability band.
This recommendation is about more than an inflation number.
A credible inflation-targeting framework requires households, businesses and investors to believe that monetary authorities will act to prevent persistent inflation.
If inflation expectations become unanchored, (i) wage negotiations, (ii) investment decisions, (iii) borrowing costs and (iv) long-term contracts all become more difficult.
The Central Bank therefore has an important responsibility to preserve price stability.
But monetary discipline cannot substitute for fiscal discipline.
If government expenditure becomes structurally disconnected from government revenue, monetary policy alone cannot permanently solve the problem.
If government expenditure becomes structurally disconnected from government revenue, monetary policy alone cannot permanently solve the problem. Sustainable economic discipline therefore requires fiscal policy to bring public spending, revenue mobilisation and debt management into a credible long-term balance. Monetary policy can help contain inflation and stabilise financial conditions, but it cannot substitute for the fiscal discipline needed to restore lasting macroeconomic stability.
This is why the post-2027 framework must preserve the institutional separation between fiscal policy and monetary policy while ensuring that the two remain mutually consistent.
Sri Lanka needs a fiscal authority capable of maintaining discipline and a Central Bank capable of maintaining monetary credibility.
Neither institution can sustainably compensate for the failure of the other.
Governance is not separate from economics
The IMF’s warning about the integrity of Sri Lanka’s anti-corruption framework deserves particular attention. At first sight, corruption legislation may appear to be a governance issue rather than an economic issue.
In reality, the two are closely connected.
If public contracts are not allocated transparently, government expenditure becomes less efficient. If tax concessions are granted without adequate justification, the revenue base is weakened.
If public assets are poorly governed, taxpayers ultimately bear the cost. If investors believe that political connections matter more than transparent rules, productive investment can be discouraged.
Good governance is therefore part of economic infrastructure.
The IMF has specifically warned that selected clauses in recently tabled amendments could weaken transparency and accountability. Whether one agrees with every aspect of the IMF’s assessment or not, the underlying principle deserves serious consideration:
Sri Lanka’s post-2022 recovery will not be durable if the institutional weaknesses associated with previous boom-and-bust cycles are allowed to return.
March 2027: the real test begins
Sri Lanka’s present IMF programme is scheduled to end in March 2027. The Government has indicated that it intends to complete the current programme and does not presently envisage another IMF programme. In my view, this is serious indeed for many reasons.
If that happens, March 2027 should not be regarded simply as an exit from IMF conditionality. It should be regarded as the beginning of a much more demanding test.
Can Sri Lanka maintain fiscal discipline without an IMF programme?
Can it preserve monetary credibility without external pressure?
Can it continue rebuilding reserves?
Can it prevent State-owned enterprises from becoming fiscal burdens?
Can it maintain transparent and accountable governance?
Can it protect vulnerable households while maintaining sustainable public finances?
And, above all, can it transform stabilisation into sustained economic growth?
These are questions that cannot be answered by an IMF review.
They must ultimately be answered by Sri Lanka’s own institutions. The IMF can provide an important framework for stabilisation, but the path towards a prosperous and resilient Sri Lanka cannot be prescribed from outside. Navigating that path entirely on its own will be extremely difficult, given the country’s institutional weaknesses, fiscal constraints, external vulnerabilities and limited policy space. The central challenge, therefore, is to use the IMF programme as a foundation for building Sri Lanka’s own long-term economic strategy—not as a substitute for one. In short, this preserves my central concern: IMF support may be necessary for stabilization, but Sri Lanka must ultimately develop and own its own development strategy.
Conclusion: Making discipline Sri Lanka’s own
Sri Lanka has come a long way since the economic crisis of 2022.
The recent IMF assessment provides evidence of genuine progress: sustained economic growth, stronger reserves, improved fiscal performance, a more resilient banking system and substantial progress on debt restructuring. These achievements should be recognised.
But they should not create complacency.
The absence of a Staff-Level Agreement following the September mission should neither be exaggerated as a crisis nor dismissed as a technicality. It provides an opportunity to examine the unfinished business of the country’s economic transformation.
The central challenge is now becoming clearer.
Sri Lanka must move from IMF-supported stabilisation to domestically owned economic discipline. This is fundamental.
That means maintaining fiscal prudence even when political pressures increase. It means protecting the credibility and independence of monetary policy. It means building reserves before the next external shock rather than after it. It means reforming State-owned enterprises, improving tax administration, protecting the integrity of anti-corruption institutions and making public investment more productive.
But there is one further requirement.
Economic discipline must ultimately produce an economy in which ordinary citizens can see the benefits through higher productivity, better employment opportunities, stronger public services and rising real living standards.
Otherwise, stabilisation risks becoming an end in itself.
The IMF programme can provide a framework.
It cannot provide Sri Lanka with a permanent development strategy.
That responsibility belongs to Sri Lanka.
The decisive question after March 2027 will therefore not be whether Sri Lanka has another IMF programme.
It will be whether the country has built institutions strong enough not to need another crisis before it rediscovers the value of economic discipline. The journey from crisis to stability may have been the first transformation.
The journey from stability to prosperity will be the harder one.
The real test is whether Sri Lanka can make economic discipline its own — and use that discipline not merely to avoid another crisis, but to transform the economy and improve the lives of its people.
(The writer served as the Special Advisor to the Office of the President of Namibia from 2006 to 2012 and was a Senior Consultant with the UNDP for 20 years. He was a Senior Economist with the Central Bank of Sri Lanka (1972-1993). He can be reached via asoka.seneviratne@gmail.com.)