IMF urges Sri Lanka to focus on monetary policy to tackle inflation rise

IMF said Sri Lanka needs to tighten its monetary policy to contain rising inflation, put its high debt repayments on track and reverse one of the worst financial crises the country has faced in years

Sri lanka, Debt Crisis, Beach — Sri Lanka: A man walks along a beach, against the backdrop of Colombo's Financial City (Photo: Reuters)

2 min read Last Updated : Mar 03 2022 | 6:43 AM IST

The International Monetary Fund (IMF) said on Wednesday Sri Lanka needs to tighten its monetary policy to contain rising inflation, put its high debt repayments on track and reverse one of the worst financial crises the country has faced in years.

In a so-called Article IV review, the first since 2018, the IMF stressed the urgency of implementing a credible strategy to restore the country's macroeconomic stability and reduce debt. It suggested that Sri Lankan authorities should reform state-owned enterprises and adopt cost-recovery energy pricing.

Sri Lanka's reserves have plunged 70% since 2020, dwindling to $2.36 billion at the end of January. But the island has debt repayments of about $4 billion this year, including a $1 billion international sovereign bond maturing in July. The dollar scarcity has prompted some analysts and rating agencies to warn of a potential default.

The foreign exchange shortage has also left Sri Lanka unable to afford essential imports of fuel, medicine and food. The country only has fuel for a few days, prompting motorists to line up at pumps and the island's power regulator to approve five-hour power cuts.

Sri Lanka has so far resisted calls to start talks with the IMF on a programme that could reassure investors and eventually help it regain access to international capital markets to repay its debt, after multiple downgrades over the last two years. The country's main opposition, the Samagi Jana Balawegaya (SJB), has called on the government to table the Article IV review before parliament and outline a sustainable economic management plan.

An Article IV review is compiled by an IMF team that visits the country to assess its economic development and discuss policies with government and central bank officials.