With a new, Left-of-Centre government in place, Sri Lanka has successfully stabilised its political offices. But what about the economy, still bearing the weight of strict regulations imposed by IMF bailouts? Tharindu Udayanga Kamburawala evaluates the fiscal performance of some recent IMF programs.
Over the past two decades, Sri Lanka’s economic trajectory has been significantly shaped by a series of International Monetary Fund (IMF) programs aimed at stabilising the economy, enforcing fiscal discipline and promoting sustainable growth. The most recent of these is the Extended Fund Facility (EFF) approved in 2023, which marks the 17th instance of Sri Lanka’s engagement with the IMF. A close examination of recent IMF-supported programs reveals a clear policy emphasis on revenue-based fiscal consolidation. This post analyses the specific fiscal targets of Sri Lanka’s recent IMF programs, the policy measures adopted to achieve them, and the actual performance of the country’s fiscal balance during those periods.
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A common objective across recent extended IMF programs in Sri Lanka has been to achieve a surplus in the primary fiscal balance — that is, the budget balance excluding interest payments. Sustaining such a surplus is crucial; failure to do so compels the country to resort to further borrowing, even for essential public services. Sri Lanka’s tax-to-GDP ratio, historically among the lowest in the world, has been inadequate for a country transitioning to middle-income status. The 2023 Extended Fund Facility, introduced in response to the country’s worst macro-economic crisis in decades, aims to reduce public debt to below 95 per cent of GDP by 2032. Achieving and maintaining a primary surplus is central to meeting this target and ensuring long-term fiscal sustainability.
For developing and emerging economies, a debt-to-GDP ratio of around 40 per cent is often cited as a prudent upper limit, while some empirical studies suggest that 77 per cent is an optimal threshold beyond which the risk of debt distress increases significantly. Sri Lanka’s debt levels have long exceeded these benchmarks. Since 1976, the country’s government debt has consistently remained above 60 per cent of GDP, and by 2022 — amid the economic fallout from the COVID-19 pandemic — it surged to 114.2 per cent of GDP. This level of indebtedness triggered severe debt distress and underscored the urgency of fiscal reform. Without a sustained primary surplus, Sri Lanka risks deepening its debt burden, making revenue-based fiscal consolidation not only a policy priority but a fiscal imperative.
Sri Lanka’s Recent Extended IMF supported Programs
Sri Lanka’s most recent IMF-supported programs include the Standby Arrangement (SBA) in 2009 and two Extended Fund Facility (EFF) programs in 2016 and 2023. Each was launched in response to distinct economic and political challenges, reflecting the evolving nature of Sri Lanka’s fiscal vulnerabilities and policy priorities.
The SBA was introduced in the aftermath of the global financial crisis, which exposed the country’s deep-seated economic fragilities. A combination of loose fiscal policies, dependence on short-term external financing and an overvalued exchange rate left Sri Lanka acutely vulnerable to external shocks. The sudden halt in capital inflows and the rapid depletion of foreign exchange reserves necessitated IMF assistance. The SBA aimed to cushion the impact of the external crisis, restore fiscal stability and support the financial system — all the while avoiding a disorderly currency devaluation.
The 2016 Extended Fund Facility (EFF) came at a time of political transition and economic reform opportunity. Although the country had maintained a degree of economic momentum, structural weaknesses — particularly in public finance and external accounts — posed persistent risks. The program focused on strengthening macro-economic fundamentals through fiscal consolidation, public debt reduction and structural reforms designed to foster inclusive growth and long-term financial stability.
Sri Lanka’s most recent Extended Fund Facility (2023) , responded to a far deeper and more complex crisis. Years of fiscal mismanagement combined with the global impact of the COVID-19 pandemic and the collapse of access to international capital markets pushed the country into a state of severe economic distress. The 2023 program aims to restore macro-economic and debt sustainability, protect the most vulnerable segments of the population and stabilise the financial sector. Notably, it also emphasises governance and anti-corruption reforms to rebuild public trust and create a foundation for sustainable, resilient growth.
Specific Fiscal Targets of Recent IMF Programs
Table 1 offers a comparative overview of the specific fiscal targets, associated policy measures and outcomes of three recent IMF programs in Sri Lanka: the SBA and the EFF in 2016 and 2023. It reveals a consistent focus on reduction of deficit and achieving primary balance surpluses across all three programs, but the outcomes vary considerably. The 2009 program introduced tax reforms to raise revenue, including adjustments to the Nation Building Tax and excise taxes. However, despite these measures, the fiscal deficit target was missed, with the deficit narrowing only to 6.8 per cent of GDP instead of the intended 5 per cent.
The 2016 program was more ambitious, aiming for a primary surplus by 2018 and a reduced deficit by 2020. While the primary surplus target was met, external shocks like the Easter Sunday attacks and political changes disrupted fiscal consolidation, resulting in a widening deficit of 12.8 per cent by 2020. In contrast, the 2023 program demonstrates stronger progress. Supported by more aggressive revenue mobilisation including VAT hikes and stricter income tax enforcement — Sri Lanka improved its revenue-to-GDP ratio significantly. Although the final targets are set for 2025, interim improvements suggest greater success in meeting fiscal goals under the ongoing program.
Sri Lanka’s Fiscal Performance during Recent IMF programs
When analysing fiscal adjustment under IMF-supported programs in South Asia, Aghevli, Kim and Neiss (1987) employed a ‘before-and-after’ method, comparing pre- and post-Program averages of key fiscal indicators with the averages observed during the Program period. Following this approach, Table 2 presents the evolution of Sri Lanka’s primary balance and overall fiscal balance under the SBA and EFF 2016, offering insight into the degree of fiscal consolidation achieved during these programs.
Under the SBA, the overall fiscal deficit as a percentage of GDP widened slightly during the Program period relative to the pre-Program average. This was primarily due to the significant spike in expenditure in 2009, particularly on defence, as the civil war drew to a close. Nonetheless, the post-Program years show some consolidation with the deficit narrowing to 5.73 per cent, although the final program target of 5 per cent was missed, with the actual out-turn at 6.8 per cent by 2011. Meanwhile, the primary balance improved modestly during the Program, from an average of -1.99 per cent pre-Program to -1.78 per cent during the Program years. This moderate progress was underpinned by strong GDP growth following the end of the war — growth rates reached 8 per cent or higher from 2010 to 2012 — although this expansion was largely driven by the non-tradable sector and financed through external borrowing, limiting the space for structural reforms in the tradeable sector. Figure 1 illustrates the fiscal performance during the SBA.
The EFF 2016 initially showed stronger signs of fiscal consolidation. Both the primary balance and the overall fiscal balance improved in the early Program years, with the primary balance reaching a surplus in 2018 — an important milestone reflecting the impact of tax reforms, including amendments to VAT and the Inland Revenue Act. This trajectory, however, was disrupted by political developments following the Presidential and Parliamentary elections in 2019. A new administration introduced sweeping tax cuts that significantly undermined revenue collection. As a result, the primary balance deteriorated sharply post-Program to -4.61 per cent, and the overall fiscal deficit widened to an average of -10.83 per cent, far exceeding the program target of -3.5 per cent. The ultimate outcome was a deficit of 12.1 per cent of GDP by 2020, signalling a major reversal in fiscal discipline and highlighting the fragility of reform momentum amid political transitions. Figure 2 presents the performance of key fiscal variables during EFF 2016.
The Way Ahead
Sri Lanka’s engagement with the IMF over the past two decades underscores a recurring pattern: ambitious fiscal targets, meaningful but often incomplete policy reforms and mixed outcomes in implementation. While the SBA and EFF 2016 introduced essential tax measures and achieved partial success, both were ultimately disrupted by external shocks and domestic political changes, leading to unmet fiscal targets and renewed economic vulnerabilities. In contrast, the ongoing EFF 2023 has thus far demonstrated stronger progress, particularly in revenue mobilisation and fiscal discipline, suggesting a more promising trajectory though its ultimate success will depend on sustained commitment and institutional resilience.
Going forward, Sri Lanka’s path to macro-economic stability requires more than short-term fiscal adjustments. A credible, transparent and consistent policy framework is essential, anchored in sustained primary surpluses, improved public financial management and a re-oriented tax system that ensures equity and efficiency. Governance and anti-corruption reforms must accompany fiscal measures to rebuild public trust and investor confidence. Just as importantly, fiscal consolidation efforts should be complemented by strategies to boost productivity in the tradeable sector, enhance export competitiveness and foster inclusive growth. Sri Lanka’s current reform window, supported by the IMF, offers a critical opportunity to break the cycle of repeated crises, and must not be squandered.
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Banner image © Giorgio Trovato, 2020, Unsplash.
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