IMF calls for reforms, including in fuel levies

The International Monetary Fund reached a staff-level pact with Sri Lanka, which will unlock about $700 million in financing once approved, the lender said, calling for reforms, including in fuel levies, to ensure stability and growth.

The deal comes as the island nation recovers from its worst economic crisis in decades, which led to a foreign debt default in 2022 and a $2.9-billion IMF bailout program.

Sri Lanka’s economic reforms have ‌supported the ‌recovery, but it has been significantly ​exposed ‌to ⁠the Iran ​war ⁠and needs to “build back better” after Cyclone Ditwah, the IMF added.

The Middle East conflict caused a surge in energy prices, disrupted a key tourist air hub, and affected Sri Lankans working in the region, said Evan Papageorgiou, the IMF’s mission chief for Sri Lanka.

“The staff-level ⁠agreement will go before the IMF executive board ‌at the end of ‌May or early April,” he added.

Sri Lanka will need to raise power tariffs further and carefully manage its finances to navigate the Middle East crisis, the IMF said, adding that it could revisit reserve targets under the program to help Sri Lanka pay for higher fuel costs.

The deal comes as higher energy prices have put pressure on Sri Lanka’s foreign exchange reserves, prompting the government to order public holidays on Wednesdays, ration fuel, and raise pump prices by about 35% last month to curb consumption.

Sri Lanka is in talks with China, India and Russia to ensure uninterrupted fuel supplies, and aims to spend $600 million to buy refined fuel ​for April.