Financing Sri Lanka’s post-IMF development

Sri Lanka's Extended Fund Facility with the International Monetary Fund (IMF) will conclude in March 2027, marking a seventeenth arrangement since 1965. The previous agreements have failed to alter the underlying structure of the economy, which continues to import what it consumes, export what it cannot process further, and borrow to bridge the gap.

Each program has concluded, and the conditions that facilitated them have resurfaced. The latest facility, approved in March 2023, has been the most extensive, imposed at a time of maximum creditor leverage and minimal room for the debtor. Fiscal adjustments were primarily implemented through indirect taxation, disproportionately affecting the poor.

Energy subsidies were eliminated, and utility pricing became cost-reflective, directly transmitting global price fluctuations to household budgets and industrial input costs. Public investment was curtailed, and public sector wages were maintained below inflation for years. While the revenue target was met, the social ramifications are evident.

Poverty has nearly doubled, and malnutrition among children, school dropout rates, and the depletion of household savings and assets are increasingly apparent. Additionally, the country has experienced a significant loss of skilled workers, who have migrated to the Gulf, East Asia, and the West, resulting in a diminished productive capacity.

Furthermore, the Economic Sovereignty Act of 2023 has stripped the Central Bank of Sri Lanka of operational independence, replacing it with a narrow inflation-targeting mandate and prohibiting the monetary financing of government deficits. The Economic Transformation Act of 2024 has legislated the programme's targets as binding statutory obligations for future governments.

Although the IMF program ends in 2027, the legal architecture it established remains in place. Austerity has transformed into a legal framework, rendering any future government seeking to finance development unable to access the fiscal space required. Three debt management instruments are currently under consideration: macro-linked bonds, climate swaps, and bond buybacks.

While each has its merits, none of them provides new capital for development. Instead, they focus on liability management, which, in itself, is insufficient to address the underlying issues of underdevelopment. To truly break free from the cycle of instability, Sri Lanka must first rebuild its domestic financial institutions and governance structures.