Crisis-ridden Sri Lanka's economic reforms are yielding results, but challenges remain, IMF says

COLOMBO, Sri Lanka (AP) — Debt-stricken Sri Lanka’s economic reform program is yielding the first signs of recovery, but the improvements still need to translate into improved living conditions for its people, the International Monetary Fund said Friday.

Sri Lanka has been struggling with an economic crisis since declaring bankruptcy in April 2022 with more than $83 billion in debt, more than half of it to foreign creditors.

The crisis caused severe shortages of food, fuel and other necessities. Strident public protests led to the ouster of then-President Gotabaya Rajapaksa. The IMF agreed last March to a $2.9 billion bailout package, and released the first payment shortly thereafter and the second tranche last month.

The IMF said Sri Lanka’s real GDP grew by 1.6% in the third quarter of 2023, the first expansion in six consecutive quarters. Shortages of essentials have eased, inflation remains contained and the country’s external reserves increased by $2.5 billion in 2023, it said.

“The economic reform program implemented by the Sri Lankan authorities is yielding the first signs of recovery,” said Pete Breuer, the IMF’s senior mission chief for Sri Lanka.

Breuer led a team of IMF officials who visited Sri Lanka and met with officials to discuss progress in implementing the economic and financial policies under the bailout package.

“However, challenges remain as these improvements need to translate into improved living conditions for Sri Lanka’s people,” Breuer told reporters at the end of his visit. “Sustaining the reform momentum and ensuring timely implementation of all program commitments are critical to rebuilding confidence and putting the recovery on a firm footing that will benefit all people.”

He stressed that tax policy measures need to be accompanied by strengthened tax administration, the removal of exemptions and reduction of tax evasion to make the reforms more sustainable and build confidence among creditors to support Sri Lanka’s efforts to regain debt sustainability.

Sri Lanka is hoping to restructure $17 billion of its outstanding debt and has already reached agreements with some of its external creditors.

Severe shortages of food, fuel and medicine have largely abated over the past year and authorities have restored power supply. But public dissatisfaction has grown over the government’s effort to increase revenue by raising electricity bills and imposing heavy new income taxes on professionals and businesses.

Early this month, the government raised the value added tax and extended it to cover essentials such as fuel, cellphones, cooking gas and medicines.