Sri Lanka: Third Review Under the Extended Arrangement Under the Extended Fund Facility, Financing Assurances Review, and Monetary Policy Consultation Clause-Press Release; Staff Report; and Statement by the Executive Director for Sri Lanka

THIRD REVIEW UNDER THE EXTENDEDARRANGEMENT UNDER THE EXTENDED FUNDFACILITY, FINANCING ASSURANCES REVIEW, ANDMONETARY POLICY CONSULTATION CLAUSE—PRESSRELEASE;STAFF REPORT;AND STATEMENT BY THEEXECUTIVE DIRECTOR FORSRI LANKA In the context of theThird Review Under the Extended Arrangement Under the ExtendedFund Facility, Financing Assurances Review, and Monetary Policy Consultation Clause, thefollowing documents have been released and are included in this package: •APress Releaseincluding a statement by the Chair of the Executive Board. •TheStaff Reportprepared by a staff team of the IMF for the Executive Board’sconsideration onFebruary 28, 2025, following discussions that ended onNovember23, 2024, with the officials ofSri Lankaon economic developments andpolicies underpinning the IMF arrangement under theExtended Fund Facility. Basedon information available at the time of these discussions, the staff report wascompleted onFebruary 11, 2025. •AStaff Supplementupdating information on recent developments. •AStatement by the Executive DirectorforSri Lanka. TheIMF’s transparency policy allows for the deletion of market-sensitive information andpremature disclosure of the authorities’ policy intentions in published staff reports andother documents. Copies of this report are available to the public from International Monetary Fund•Publication ServicesPO Box 92780•Washington, D.C. 20090Telephone: (202) 623-7430•Fax: (202) 623-7201E-mail:publications@imf.org Web:http://www.imf.org International Monetary FundWashington, D.C. IMF Executive Board Completes the Third Review Under theExtended Fund Facilitywith Sri Lanka FOR IMMEDIATE RELEASE •The IMF Executive Board completed the Third Review under the 48-month ExtendedFund Facility with Sri Lanka, providing the country with immediate access to SDR 254million (about US $334 million) to support its economic policies and reforms. •Performance under the program has been strong. All quantitative targets for end-December 2024 were met, except the indicative target on social spending. Most structuralbenchmarks due by end-January 2025 were either met or implemented with delay. Therecent successful completion of the bond exchange is a major milestone towards restoringdebt sustainability. •Reform efforts are bearing fruit with the recovery gaining momentum. As the economy isstill vulnerable, sustaining the reform agenda is critical to put the economy on a pathtowards lasting recovery and debt sustainability. Washington, DC–February 28, 2025:The Executive Board of the International MonetaryFund (IMF) completed the third review under the 48-month Extended Fund Facility (EFF)Arrangement, allowing the authorities to draw SDR 254 million (about US$334 million). Thisbrings the total IMF financial support disbursed so far to SDR 1.02 billion (about US$1.34billion).1 The EFF arrangement for Sri Lanka was approved by the Executive Board on March 20, 2023(seePress ReleaseNo. 23/79) in an amount of SDR 2.286 billion (395 percent of quota orabout US$3 billion. The program supports Sri Lanka’s efforts to restore and maintainmacroeconomic stability and debt sustainability while protecting the poor and vulnerable,rebuild external buffers, and enhance growth-oriented structural reforms including bystrengthening governance. Following the Executive Board discussion on Sri Lanka, Mr. Kenji Okamura, Deputy ManagingDirector, issued the following statement: “Reforms in Sri Lanka are bearing fruit and the economic recovery has been remarkable.Inflation remains low, revenue collection is improving, and reserves continue to accumulate.Economic growth averaged 4.3 percent since growth resumed in the third quarter of 2023. Byend-2024, Sri Lanka’s real GDP is estimated to have recovered 40 percent of its loss incurredbetween 2018 and 2023. The recovery is expected to continue in 2025. As the economy is still vulnerable, it is critical to sustain the reform momentum to ensure macroeconomic stabilityand debt sustainability, and promote long-term inclusive growth. There is no room for policyerrors. “Program performance has been strong with all quantitative targets met, except for theindicative target on social spending. Most structural benchmarks due by end-January 2025were either met or implemented with delay. “Sustained revenue mobilization is crucial to restoring fiscal sustainability and ensuring thatthe government can continue to provide essential services. Boosting tax compliance andrefraining from tax exemptions are key to maintaining support for economic reforms. To easeeconomic hardship and ensure the poor and vulnerable can participate in Sri Lanka’s recoveryit is important to meet social spending targets and continue with reforms of the social safetynet. Going forward, social support needs to be well-targeted towards the most disadvantagedso as to promote inclusive growth with limited fiscal space. Restoring cost-recovery electricitypricing without delay is needed to contain fisca