The International Monetary Fund (IMF) has urged Sri Lanka to allow domestic fuel prices to align with international market rates amid economic risks arising from prolonged conflicts in the Middle East, global trade uncertainties and El Niño conditions.
The IMF made the remarks following a staff-level agreement on the seventh review of Sri Lanka’s four-year Extended Fund Facility (EFF) programme.
Despite the challenging external environment, the Sri Lankan economy grew by 4.2% in the second quarter of 2026, marking 11 consecutive quarters of economic growth.
Headline inflation stood at 8% in September, while gross official foreign reserves increased to US$6.9 billion by the end of August.
The IMF said Sri Lanka’s banking system remains well-capitalised and financial performance during the first half of the year has been strong. However, IMF Mission Chief Evan Papageorgiou stressed the need to maintain fiscal discipline to manage potential pressures on inflation and foreign exchange reserves arising from external shocks.
The Fund warned that if international fuel prices rise due to conflicts in the Middle East, broad-based subsidies aimed at shielding consumers could place pressure on fiscal stability and debt sustainability.
Instead, the IMF recommended protecting vulnerable groups through targeted cash transfers to low-income households rather than relying on broad price controls.
The Fund also highlighted the need to implement a medium-term revenue strategy to strengthen government revenue and accelerate recovery efforts following Cyclone Ditwah.
If the IMF Executive Board approves the seventh review, Sri Lanka is expected to receive approximately US$345 million in financial assistance. The approval will require the submission of a budget programme aligned with 2027 parameters and confirmation of progress on debt restructuring.
