ECONOMYNEXT – Sri Lanka is going for its 18th International Monetary Fund program, barely a year after the country was given hopes that the current Extended Fund Facility which came in the wake of 2020 inflationary rate cuts will be the last.
President Dissanayake said a team will be in Sri Lanka in January and a new review will be conducted. The visit was later confirmed by the IMF.
President Dissanayake said that next year’s budget will have 500 billion rupees of extra spending after Cyclone Dakwah.
That means the fiscal targets in the Staff Level Agreement will have to be adjusted.
In addition, the IMF is expected to give 200 million US dollars through a Rapid Financing Instrument.
The facility has less conditions, no reviews and is one-off.
Sri Lanka is already on an Extended Fund Program where policy and strong conditionality is embedded.
The RFI is designed to provide “rapid, low-access financial assistance to countries facing urgent balance of payments needs that, if not addressed, would result in an immediate and severe economic disruption,” according to the IMF.
“Respond to situations where a full-fledged economic program is not necessary because the need is transitory and limited in nature, or not feasible because of policy design, capacity and other implementation constraints.”
Sri Lanka has to pay around 226 million US dollars to the IMF in 2025, in repaying loans taken in 2016 after a balance of payments crisis triggered by rate cuts and liquidity injections in late 2014 and 2015 as well as other charges, according to information posted online by the lender.
During the currency crisis triggered by 2020 rate cuts which ended in external default, Sri Lanka also sold a special drawing rights allocation on which charges have to be paid.
Sri Lanka started standby arrangements (the archetypical bailout of central banks) when the Fed also started ‘lean against the wind policy’ (after triggering inflation with ‘lean into the wind’ rate cuts to boost employment artificially triggering credit cycles), and commodity prices including gold began to bubble.
Charles Coombs the head of New York Fed’s fx trading desk invented counterparty swaps as a trick to avoid redeeming dollar notes instead of hiking rates during this period.
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The Bretton Woods collapsed in 1971, plunging the world into high inflation.
After the collapse of the Bretton Woods, Sri Lanka continued to go to the IMF in the 1970s.
Monetary instability worsened in the 1980s with steep depreciation and heightened social unrest after the IMF’s Second Amendment to its articles and programs continued.
Over 2025, Sri Lanka rupee depreciated from 297 to 308 to the US dollar amid record current account surpluses, sharply reduced budget deficits which macro-economists have blamed for external trouble for decades instead of correcting the operating framework of the central bank, exactly like the Fed.
A tsunami in 2004 delivered a shock to the credit system, allowing the central bank to initially appreciate currency which was hit by liquidity injections made to offset lost fuel tax revenues. Aid poured in, particularly to private parties who sold them in the market.
The central bank has busted the currency from 4.77 to 308 to the US dollar since it was set up in 1950 and joined the IMF the next day.
Sri Lanka parliament’s Committee on Public Finances earlier this month questioned the practice of the central bank engaging in domestic swaps, which is essentially borrowing in dollars and lending in rupees to suppress rates which exposes the bank to massive forex losses after the currency eventually collapses.
One of Sri Lanka’s early banks of issue, the Eastern and Oriental Bank, collapsed in 1884, in part due to borrowing in gold and lending in silver (the rupee was silver based) analysts say.
British rulers then set up a currency board which maintained external stability until the central bank was created in 1950.
“When credit picks up instability can come swiftly,” says Bellwether. “Monetary troubles started in February 1952, in a country that was a Sterling Area darling a few months ago even under the central bank which ran explicit deflationary policy in the first year of its operation.
“Then there were street riots in 1953.”
In the past, banks of issue that made policy errors and had a bad operating framework ‘closed their doors’ and were not revived by the IMF to create further trouble a few years later, giving a permanent solution to the problem.
The IMF was originally set up to stop currency depreciation under the Bretton Woods as it hurt free trade, when the invention of open market operations and policy rates busted developed nation currencies wholesale in the inter-war years.
But after the collapse of the Bretton Woods, the IMF was not closed and then started to encourage countries that became unstable to have ‘competitive’ exchange rates.
Reserve collecting central banks like Sri Lanka in the 1980s then started to target money supply without a floating rate, leading to even worse crises, and never before seen inflation and depreciation.
Sri Lanka’s current troubles after the end of a civil war from flexible inflation targeting or attempting to target inflation without a clean float and also tax and rate cuts to target growth or potential output.
Almost back-to-back IMF programs continued in the 1980s and early 1990s. There was a break between 1994 and 2009 when there was only one stand by program.
Two parallel programs in 2003 (an Extended Fund Facility and Extended Credit Facility) were started sequence economic liberalization, when the balance of payments was strong and were not bailouts per se.
The programs was abandoned by a new government that came into office. Amid certain events, the IMF then closed its office in Colombo.
Ironically, Sri Lanka’s governments are deprived of foreign currency revenue streams due to a privilege given to central banks called ‘Government Acceptance’ which is one of the reasons it has to go to the IMF with a begging bowl for dollars, says EN’ economic columnist Bellwether.
Sri Lanka’s Treaury is now supposedly ‘swimming in cash’ with a extra trillion rupees borrowed from markets.
Sri Lanka’s 18th program is coming after Cyclone Ditwah hit the island.
It is unusual for Sri Lanka to ask the IMF for ‘balance of payments’ needs just because of a cyclone hit.
But there have been concerns over low reserve collections as private credit recovered and rates were cut, particularly in May and a ‘single policy rate’ was adopted under IMF technical advice. Potential output targeting (printing money for growth) was also after IMF technical advice.
“This time must be different,” IMF’s then First Deputy Managing Director Gita Gopinath said at a forum in Colombo in June 2025.
“As President Dissanayake has said, let us ensure this is the last IMF program Sri Lanka will need.” (Colombo/Dec07/2025)
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