Sri Lanka’s latest IMF review is unfolding against a potentially explosive economic contradiction: the Government is seeking to preserve hard-won fiscal stability while households continue to confront the consequences of higher energy costs.
This issue was discussed when IMF Mission Chief Evan Papageorgiou and his delegation met President Anura Kumara Dissanayake yesterday at the Presidential Secretariat. The delegation is conducting the Seventh Review of Sri Lanka’s IMF Extended Fund Facility programme together with the 2026 Article IV Consultation during its September 10–23 Colombo mission.
The Presidential Media Division said progress on social welfare programmes was among the issues reviewed, but provided no detailed breakdown of what the IMF delegation and the President discussed.
The omission is significant because social protection has been one of the continuing conditions surrounding Sri Lanka’s post-crisis economic restructuring.
When the EFF was approved in March 2023, the IMF supported the Government’s commitment to strengthening social safety nets. A minimum spending floor and a new Social Registry were identified as mechanisms intended to improve welfare protection and target assistance more effectively.
But the subsequent record reveals a persistent weakness. IMF review statements issued through 2024 and 2025 indicated that quantitative programme targets were achieved in successive periods, with the indicative social-spending target repeatedly standing out as the exception.
The tension became sharper in the combined Fifth and Sixth Reviews concluded in April this year. The IMF linked continued relief measures to the restoration of cost-recovery electricity and fuel pricing, while simultaneously requiring vulnerable sections of society to remain protected.
That balancing act has become more complicated because the public is now facing additional energy-cost pressures linked to the conflict in the Middle East. The issue was specifically raised during yesterday’s discussions.
For the Government, energy pricing is not merely an accounting issue. Cost-reflective tariffs and fuel prices can strengthen the finances of State-owned energy enterprises and reduce pressure on the national budget. But they can also increase household expenditure and raise costs throughout the economy.
President Dissanayake told the IMF delegation that economic indicators demonstrated that Sri Lanka had entered a period of stability. He said the Government intended to use that stability as the foundation for a “transformative era” aimed at improving living standards.
He cited 4.2% economic growth during the second quarter and argued that IMF-backed reforms had provided the country with an important foundation for economic resilience, including against the effects of Cyclone Ditwah and the Middle East conflict.
The IMF mission chief, meanwhile, commended Sri Lanka’s fiscal discipline, improved Government revenue and increased foreign investment, while emphasising the need to sustain stability into 2027 and beyond.
The unresolved question is whether fiscal consolidation and welfare protection can advance together.
Sri Lanka’s recovery therefore faces a critical test: can the Government maintain IMF-mandated financial discipline without allowing higher energy costs and inadequate social spending to erode the living-standard gains it says the recovery is designed to deliver?