Sri Lanka Takes Steps to Stabilize Economy Amid Inflation Increase and IMF Bailout Conditions

In light of rising energy costs that contributed to increased inflation in October 2023, Sri Lanka has implemented crucial measures to comply with the International Monetary Fund’s (IMF) $3 billion bailout agreement and its associated loan program. This includes the Central Bank of Sri Lanka’s decision to lower its policy rate for the third time this year, a move intended to stimulate economic growth and reduce real borrowing costs.

The consumer price index in Colombo showed a 1.5% year-on-year increase, falling short of the expected 2.3% rise but slightly higher than September’s 1.3%. Despite concerns regarding a potential reversal of disinflation due to raised energy tariffs and taxes, the Central Bank is optimistic that price increases will stabilize around the 5% target.

To address fiscal risks stemming from state-owned enterprises, Sri Lanka has raised electricity prices by around 20%, aligning with the IMF’s loan program requirements.

Upcoming events include the Central Bank’s monetary policy review on November 23 and the annual budget announcement on November 13, both of which are expected to shed light on Sri Lanka’s economic plans amidst the prevailing inflationary environment and IMF obligations.

Additionally, Sri Lanka has received preliminary approval for a $330 million IMF loan installment and is in the process of restructuring its debt through discussions with an official creditors committee co-chaired by India, Japan, and France. This committee has made significant progress and is nearing the submission of a restructuring proposal to local authorities.

These concerted efforts highlight Sri Lanka’s dedication to stabilizing its economy and fulfilling the terms of its IMF loan agreement in the face of escalating inflation and rising energy costs.