Sri Lanka’s economy has continued to expand despite a series of external shocks, with economic activity growing 4.2% in the second quarter of 2026, the International Monetary Fund (IMF) said after concluding its latest mission to the country.
The growth recorded during the April-June quarter marked the 11th consecutive quarter of economic expansion, highlighting the continued recovery of the island nation after the severe economic crisis it faced in 2022. The IMF’s assessment came at the end of its September 10-23 mission to Sri Lanka, during which its officials held discussions with the government, central bank, private-sector representatives, civil society organisations and other stakeholders.
The IMF said Sri Lanka’s economic performance had remained resilient in the face of successive shocks. Gross official reserves rose to $6.9 billion by the end of August 2026, while the country’s banking sector remained well capitalised and profitable. The Fund also noted that the fiscal performance during the first half of the year had been strong and that the country’s debt restructuring process was largely complete.
However, the IMF cautioned that significant risks remained. Headline inflation increased to 8% year-on-year in August, largely because of the impact of higher global oil prices. While inflation expectations remained broadly anchored, the Fund said Sri Lanka continued to face uncertainty arising from the conflict in West Asia, changes in global trade policies and the potential economic impact of El Niño.
The IMF stressed that maintaining macroeconomic stability would require continued adherence to prudent economic policies. It called for efforts to rebuild fiscal and external buffers, maintain price stability, strengthen governance reforms and improve social protection for vulnerable sections of the population.
A key recommendation was the preparation and implementation of a medium-term revenue strategy. According to the Fund, Sri Lanka needs to sustain revenue mobilisation while making the tax system more efficient and equitable. Measures to broaden the tax base, improve revenue administration and review tax exemptions and incentives were identified as important elements of the broader reform process.
The IMF also called for continued cost-recovery-based energy pricing to limit financial risks associated with state-owned enterprises. It said the authorities should address bottlenecks that have slowed capital expenditure and accelerate reconstruction and recovery efforts linked to Cyclone Ditwah.
On monetary policy, the Fund said Sri Lankan authorities should remain prepared to respond to renewed inflationary pressures while maintaining price stability under the country’s flexible inflation-targeting framework. It also supported greater exchange-rate flexibility, saying this could help the economy absorb external shocks and contribute to rebuilding foreign-exchange reserves.
The IMF said it would be prudent to retain Sri Lanka’s existing 5% inflation target and accountability band following the first statutory review of the inflation-targeting framework. It added that consideration could be given to moving towards a lower target in a future review if the country establishes a sustained record of low and stable inflation.
The Fund also raised concerns about proposed amendments to anti-corruption legislation, saying certain provisions could weaken transparency and accountability. It stressed that maintaining the integrity of the legislative framework would be important for strengthening public confidence in institutions.
The IMF said Sri Lanka now needed to move beyond economic stabilisation towards broader structural transformation. This would require sustained reforms aimed at liberalising trade, modernising business and labour regulations, improving access to finance and expanding digitalisation.
During its mission, the IMF team also visited Jaffna in the Northern Province and held discussions on opportunities to stimulate investment and employment. The Fund identified agriculture, fisheries, tourism and renewable energy, along with improvements in connectivity and skills, as areas with potential to support regional economic development.
The IMF said strengthening social protection would also be necessary to ensure that the benefits of Sri Lanka’s economic recovery are more widely shared. The Fund’s team met President and Finance Minister Anura Kumara Dissanayake, Prime Minister Harini Amarasuriya, senior government officials, Central Bank Governor P Nandalal Weerasinghe, parliamentarians, private-sector representatives and civil society groups during the mission.
The September mission was linked to discussions on Sri Lanka’s seventh review under its Extended Fund Facility programme as well as the 2026 Article IV consultation. The IMF said discussions with the Sri Lankan authorities would continue with the aim of reaching a staff-level agreement in the near term, which would pave the way for the timely completion of the seventh review.
