Sri Lanka’s path to recovery remains woefully unfinished. While analysts have pointed to signs of stabilization in 2024 and early 2025, the National People’s Power (NPP) government’s inconsistent handling of the IMF-backed reform agenda often overturning or diluting commitments inherited from past administrations threatens to erode hard-won gains. The result: growth remains below pre-crisis levels, poverty is entrenched, and investor confidence is fragile.
According to the World Bank’s latest Sri Lanka Development Update, “Better Spending for All,” the economy is projected to grow 4.6 percent in 2025 before slowing to 3.5 percent in 2026.
While that represents momentum, the report cautions that the recovery is “uneven and incomplete,” with economic output still trailing 2018 levels and poverty stuck at nearly 24.5 percent of the population.
In 2024, Sri Lanka surprised many by achieving roughly 5 percent GDP growth, exceeding the IMF’s earlier target.
Revenue mobilization improved significantly: the revenue-to-GDP ratio reportedly rose to 13.5 percent in 2024, up from just over 8 percent in 2022. Official reserves also rebounded, reaching about US$6.5 billion by March 2025.
Yet by mid-2025, fragility had crept back in. A US State Department report flagged “policy inconsistency, regulatory uncertainty, bureaucratic delays and poor responsiveness” as key obstacles for foreign direct investment, noting that projects such as a planned USD 400 million wind farm by Adani were scrapped amid government hesitation over tariffs and rule changes.
Reuters analysts now expect growth in 2025 to hover between 4.0 and 4.5 percent, citing slippages in budget implementation and capital spending.
Part of the challenge lies in how the NPP government has retreated from or reversed reforms championed by the previous administration and required by the IMF. For example, the NPP government announced the scrapping of the CEB Reforms Act of 2024, which had permitted private sector participation in electricity generation and aimed to ease the balance sheet burdens on the state.
That reversal directly conflicts with prior commitments in the IMF extended fund facility and was viewed as a major policy inconsistency by observers. At the same time, in June 2025 the government accepted IMF demands to raise electricity tariffs by 18.3 percent through December 2025, passing through significant costs to households and businesses already strained by inflation.
Though this move aligns with IMF structural conditions, the government’s earlier rhetoric had suggested it would resist such austerity measures. The volte-face has prompted accusations of policy immaturity.
The NPP’s approach to state-owned enterprises (SOEs) also exposes contradictions. While the government publicly expressed Marxist leanings and had criticized privatization, it has quietly resumed talks on restructuring the national airline and other entities under IMF pressure.
However, debates over ownership, social welfare of workers, and tariff regimes continue to stall real progress.
The IMF itself remains cautious. In April 2025, Sri Lankan authorities reached a staff-level agreement for the fourth review of the program, thus unlocking approximately US$344 million upon Executive Board approval—but only after committing to prior actions such as restoring electricity cost-recovery pricing and instituting an automatic tariff adjustment mechanism.
Yet in public statements, government officials have occasionally questioned or backtracked on the timing and sequencing of reforms.
Moreover, IMF officials warned in June that Sri Lanka “has no room for policy errors,” noting that half of its sixteen previous IMF programs ended prematurely due to weak commitment or reform fatigue.
Compounding the problem, the government pledged to raise public investment from 13 percent to 18 percent of total expenditure in 2025.
However, analysts caution that meeting IMF revenue targets could force capital spending to be cut
Meanwhile, interest payments alone are projected to consume 41 percent of government outlays in 2025, choking fiscal flexibility.In sum, Sri Lanka remains caught in a limbo: macroeconomic stability has returned in part, and reform gains are visible, but the NPP government’s policy reversals, capacity constraints, and mixed messaging risk undermining the recovery. To avoid another cycle of crisis, the country needs coherent, consistent execution of reforms not rhetorical shifts. Absent that, growth may remain sluggish and development goals will remain beyond reach
