IMF Board to consider US$200 million emergency loan for Sri Lanka on Dec 19

Sri Lanka
By Editor_1

COLOMBO – The Executive Board of the International Monetary Fund (IMF) is scheduled to meet on Friday (19) to consider Sri Lanka’s request for emergency financing under the Rapid Financing Instrument (RFI), according to a notice published on the IMF’s website.

Sri Lanka has sought US$200 million under the RFI following the widespread damage caused by Cyclone Ditwah, which struck the island in the final week of November. The RFI provides upfront financial assistance without conditional program reviews, allowing countries facing urgent balance-of-payments needs to access rapid support.

The cyclone is expected to significantly alter Sri Lanka’s fiscal outlook. Government expenditure in 2026 is projected to rise by at least Rs 500 billion, substantially reshaping the budget framework on which the country’s current IMF-supported program targets were based.

As a result, an IMF mission is expected to visit Sri Lanka in January 2026 to renegotiate a staff-level agreement in line with the revised fiscal position. This review, originally scheduled for December 15, has been deferred to accommodate the changed economic circumstances.

Meanwhile, Sri Lanka’s external position remains under pressure. Despite a policy rate cut in March and a shift towards a less deflationary monetary stance, the Central Bank of Sri Lanka has been unable to accumulate foreign reserves at the pace initially anticipated. However, both government and central bank obligations related to reserves have continued to be serviced.

In December, Sri Lanka secured a series of budget support loans, particularly from the Asian Development Bank (ADB). These facilities, which do not add to domestic spending, are expected to support reserve accumulation or facilitate external debt repayments. Currently, the central bank continues to provide foreign currency to the government for debt servicing.

Analysts have cautioned that interest rate policy cannot be guided solely by historical 12-month inflation figures, given the central bank’s obligations to rebuild reserves and meet debt repayment targets. They argue that domestic credit conditions and reserve accumulation requirements should remain key determinants of monetary policy.

Sri Lanka’s rupee has depreciated during 2025 amid reduced deflationary policy and increased central bank purchases of foreign currency, which analysts say amount to balance-of-payments monetisation. This, they warn, risks restricting currency convertibility for private sector importers.

Economists have also highlighted gaps in the previous IMF program, particularly the absence of firm requirements to reduce the central bank’s domestic asset holdings. In this context, analysts have urged the Treasury to procure foreign exchange independently, like other importers, rather than relying on central bank financing.

Sri Lanka defaulted on its external debt in 2022 following years of aggressive macroeconomic policies, including sharp tax and interest rate cuts aimed at stimulating potential output under so-called full-employment strategies.

-ENCL

Editor_1
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