The IMF's stance on Sri Lanka's aid is conditional on firm fiscal discipline, structural reforms (especially in State-Owned Enterprises - SOEs), and good governance to ensure sustainable economic recovery, not just short-term relief, linking continued support (like the EFF) to policy implementation, even amidst recent cyclone impacts, highlighting that aid unlocks further multilateral support if Sri Lanka stays on track with its reform agenda.
Sri Lanka’s request for emergency financing has once again brought into sharp focus the International Monetary Fund’s firm insistence on policy discipline over political expediency. The IMF Executive Board is scheduled to meet on December 19 to consider Sri Lanka’s request for US$200 million under the Rapid Financing Instrument (RFI), sought in the aftermath of Cyclone Ditwah, which struck in the final week of November.
While the RFI is designed for swift disbursement and carries no post-financing reviews, the broader context in which the request is being made is far from straightforward. Sri Lanka remains under a US$2.9 billion Extended Fund Facility (EFF) programme, where progress is tightly measured against quantitative benchmarks and structural reforms. IMF officials have made it clear that emergency assistance does not dilute expectations under the main programme.
The cyclone has materially altered the country’s fiscal outlook. Government expenditure for next year is now projected to increase by at least Rs. 500 billion, significantly reshaping the 2026 budget framework upon which current IMF targets were built. As a result, the fourth review of the EFF originally expected to conclude by mid-December has been deferred. An IMF mission is now anticipated in January 2026 to renegotiate a revised staff-level agreement reflecting the changed fiscal realities.
Complicating matters further is the Central Bank’s limited ability to accumulate foreign exchange reserves. Following a policy rate cut in March and a broader easing of deflationary measures, reserve accumulation has fallen short of initial IMF expectations. Although the government and the Central Bank have continued to meet external debt repayment obligations, reserve buffers remain under strain.
Recent budget-support financing from multilateral lenders, particularly the Asian Development Bank, has offered some relief. These facilities, which do not feed into domestic spending, are expected to either bolster reserves or directly service external liabilities. Meanwhile, the Central Bank continues to supply foreign currency to the Treasury for debt repayments—an arrangement analysts argue distorts monetary policy signals.
Market observers warn that Sri Lanka’s interest rate trajectory is now shaped less by inflation dynamics and more by IMF-mandated reserve targets. The rupee’s depreciation in 2025 has been attributed to reduced deflationary policy and sustained Central Bank dollar purchases, which critics say amount to indirect monetisation of the balance of payments while constraining private-sector access to foreign exchange.
Against this backdrop, economists argue that the IMF’s current stance is unambiguous: emergency relief may be granted, but it does not replace the need for tighter fiscal control, credible monetary discipline, and adherence to EFF benchmarks conditions shaped by hard lessons from Sri Lanka’s 2022 sovereign default.