In a dramatic twist, the IMF has exposed Sri Lanka for misreporting key expenditure data under its bailout program but instead of pulling the plug, it granted a $350 million payout while demanding sweeping reforms and transparency. The country now faces heightened scrutiny over fiscal credibility, and a global spotlight on governance and data accuracy.
The International Monetary Fund (IMF) Executive Board has completed the fourth review under Sri Lanka’s 48-month Extended Fund Facility (EFF) arrangement, releasing SDR 254 million (approximately US$350 million), bringing the country’s total IMF assistance to SDR 1.27 billion (around US$1.74 billion).
Originally approved in March 2023, Sri Lanka’s SDR 2.286 billion (about US$3 billion) package aims to restore macroeconomic stability. Its key goals include restoring fiscal and credit sustainability, rebuilding external reserves, stabilizing the financial system, reducing corruption risks, and driving structural reforms.
However, during this fourth review, the Executive Board flagged serious concerns over erroneous reporting by Sri Lanka regarding central government expenditure arrears. This misinformation led to unauthorized disbursements and violated Sri Lanka’s obligations under Article VIII, Section V. The IMF identified the underreporting through a granular analysis of budget lines.
Despite the breach, Sri Lankan authorities have cooperated with the IMF to rectify these issues, including implementing corrective actions for reporting arrears and committing to improved data practices via technical assistance. The Board accepted the government’s request for exceptions to non-compliance, citing proactive remediation.
Deputy Managing Director and Acting Chairman Kenji Okamura stated, “Sri Lanka’s reforms are showing positive results with inflation down, reserves growing, and revenues improving. But risks remain high, and the debt restructuring phase must conclude swiftly. Consistent implementation is vital.”
He stressed the need to enhance revenue collection, tighten tax compliance, improve public financial management, and maintain electricity price reforms. Social protection measures must also be scaled up to shield vulnerable groups, while capital expenditure should align with the fiscal roadmap.
The Board praised progress in debt restructuring but emphasized the urgency of sealing agreements with remaining creditors. Further monetary policy tightening may be needed to ensure price stability, preserve central bank independence, and encourage exchange rate flexibility.
In terms of financial sector reform, the IMF urged Sri Lanka to confront non-performing loans, supervise state-owned banks rigorously, and strengthen bankruptcy and resolution frameworks to rejuvenate private credit flows.
On the structural side, boosting trade facilitation, export diversification, and governance reforms remain critical. Sri Lanka was also encouraged to implement the new Public Financial Management (PFM) law to mitigate future risks of arrears and misreporting.
The IMF acknowledged that the initial misinformation stemmed from line ministries’ delays and misunderstandings in defining “late payments.” Yet, it applauded the government’s post-facto adjustments and commitment to long-term procedural reforms.
In conclusion, despite serious reporting lapses, the IMF extended support while putting Sri Lanka on notice. With credibility now under the microscope, the island’s path to recovery hinges on transparent governance and relentless reform.
