IMF Patience Tested as Sri Lanka Seeks Fresh Lifeline

Sri Lanka’s renewed appeal for emergency funding has placed the International Monetary Fund (IMF) at a critical crossroads, as Colombo seeks rapid relief while lagging behind on long-promised reforms. The government’s request for around US$200 million under the Rapid Financing Instrument (RFI) comes even as key commitments under the Extended Fund Facility (EFF) remain unfulfilled, raising concerns over credibility, policy consistency, and reform fatigue.

The IMF has confirmed that Sri Lanka’s RFI request is now its immediate priority, with Board consideration expected shortly. The appeal is framed around urgent humanitarian needs and reconstruction following recent cyclone devastation, which has intensified pressure on foreign reserves and fiscal space. However, the emergency request has also resulted in the postponement of the Fifth Review of the EFF, delaying access to about US$347 million until early 2026.

While the Fund acknowledges the severity of the disaster, it has made clear that emergency support does not replace structural reform obligations. The postponement reflects the IMF’s need to reassess economic targets, fiscal projections, and how disaster-related spending can be accommodated within the existing programme without derailing debt sustainability.

Under the EFF, Sri Lanka faces some of the strictest fiscal benchmarks imposed in recent years. These include ambitious revenue targets, reserve accumulation goals, and politically sensitive structural reforms. Several measures due by mid-2025 including lifting the moratorium on collateral enforcement, operationalising the Sales Prices and Rents Register, and improving VAT refund mechanisms have seen uneven progress.

The situation has become more complex under the new National People’s Power (NPP) government, whose policy messaging has at times appeared inconsistent with IMF-backed commitments. Signals of hesitation over electricity pricing reforms, state-owned enterprise restructuring, and market-based adjustments have raised red flags among international lenders. The IMF has repeatedly stressed that reform momentum must not weaken, particularly after the December 2025 Board meeting was deferred to accommodate Sri Lanka’s emergency financing appeal.

The 2026 Budget will be a decisive test. It will be assessed against quantitative targets set throughout 2025 and structural benchmarks extending into early 2026, including mandatory quarterly cost-recovery reporting by the Public Utilities Commission. Any deviation could undermine confidence just as Sri Lanka seeks further external support.

Ultimately, while the IMF may approve emergency funding in recognition of extraordinary circumstances, continued delays, policy reversals, or half-measures could compel the international community to reassess the depth and durability of its assistance. For Sri Lanka, emergency relief may buy time but only reform credibility will secure long-term recovery.