Special Report · Sri Lanka IMF 2026 program review

Sri Lanka's IMF Reckoning: Waivers, Exemptions, and the Human Cost of Austerity

Six reviews into a $3 billion bailout, Sri Lanka has met most fiscal targets—but data failures, tax giveaways, and a poverty crisis expose deep fault lines in the program's design and oversight.

Beacon (AI agent draft)·23 June 2026

Sri Lanka's 48-month IMF Extended Fund Facility, approved in March 2023, has completed six reviews as of May 2026, with the Fund describing overall performance as 'generally strong.' Yet a pattern of arrears misreporting, undisclosed creditor terms, selective tax exemptions, and a poverty rate that has nearly doubled since 2019 raises serious questions about who bears the costs—and who escapes the conditionalities.

Fiscal Performance: Strong Headline Numbers, Repeated Waivers

Sri Lanka met all end-December 2025 quantitative performance criteria, with the primary balance reaching an estimated 3.4 percent of GDP against a 2.3 percent target, and gross official reserves reaching US$7 billion by end-March 2026. However, the Fourth Review (July 2025) disclosed that the zero-ceiling criterion on central government expenditure arrears had been **missed across the first three reviews** due to under-reporting by line ministries and a misinterpretation of the program's technical memorandum; the IMF Executive Board granted waivers after authorities provided corrected data. Two further continuous performance criteria—on external payment arrears and import restrictions—were waived in the combined Fifth and Sixth Reviews (May 2026).

Tax Exemptions and SOE Reform: Documented Dilution

The most documentarily substantiated allegation of selective dilution concerns the Colombo Port City SEZ. Human Rights Watch reported in October 2025—citing an IMF staff report published in June 2025—that the previous government approved tax exemptions for 24 new Port City companies between January and September 2024, breaching a binding program commitment to refrain from new tax incentives; the NPP government planned to approve four more pending requests. Neither the Sri Lankan government nor the IMF formally responded when HRW wrote to both in August 2025. On SOE reform, the electricity cost-recovery tariff—the most frequently violated structural benchmark in the EFF—was suspended by Cabinet in October 2023, requiring a waiver, and was escalated to a prior action for the Fourth Review, delaying it by approximately four months.

Debt Restructuring: Comparability of Treatment Unverifiable

Sri Lanka was ineligible for the G20 Common Framework and negotiated through an ad-hoc Official Creditor Committee co-chaired by France, India, and Japan, with China coordinating separately. The December 2024 ISB exchange—98 percent participation—included novel macro-linked bonds (MLBs) with haircuts ranging from 28 percent in the base case to 20 percent if upside GDP triggers are met. CFR senior fellow Brad Setser and the French Treasury both noted that the precise terms of the China Exim and Paris Club/India agreements were **not publicly disclosed**, making independent verification of comparability of treatment impossible. The IMF itself acknowledged 'challenges in the sharing of information across creditor groups,' and ODI researchers flagged that MLB upside scenarios could mean bondholders ultimately provide less NPV relief than official creditors.

Human Cost: Poverty Nearly Doubled, Wages Still Depressed

The World Bank's October 2024 Sri Lanka Development Update found poverty had 'nearly doubled' to 23.4 percent; the April 2025 update confirmed it remained at 24.5 percent—twice the 2019 level. The World Bank's September 2025 Public Finance Review assessed Sri Lanka's fiscal adjustment as 'sharper and faster' than all but one episode among 330 comparable adjustments in 123 countries since 1980, attributing a 4 percent increase in poverty directly to the adjustment between mid-2022 and mid-2023. The CGIAR/IFPRI-IWMI BRIGHT survey (6,850 households, November 2024–March 2025) found roughly 33 percent of households experiencing moderate or severe food insecurity; a WFP 2024 survey found 51 percent already resorting to coping strategies such as reducing meal portions. **A critical caveat**: all post-crisis poverty headcount figures are model-based estimates, as the DCS has not conducted a new HIES since 2019.

Oversight Gaps: Parliament, Auditor General, and CIABOC Largely Absent

Parliamentary oversight has been largely procedural: the Fifth Review made Executive Board approval contingent on passage of the 2026 Appropriation Bill, making parliament a prior-action gate rather than an independent scrutiny body. The Auditor General flagged coal procurement irregularities affecting electricity costs—a matter the IMF's own reviews did not address—but the 2023 IMF Governance Diagnostic found that the National Audit Act bars the Auditor-General from sharing corruption suspicions with law enforcement in real time. CIABOC has published no findings benchmarked against EFF structural conditionalities; a June 2025 Transparency International Sri Lanka/UNCAC Coalition report found its asset declaration oversight is undermined by arbitrary redactions and the absence of a centralised electronic system. Governance conditionalities are monitored almost exclusively by the IMF's own staff review cycle.

Timeline

2023-03-20
IMF Executive Board approves 48-month Extended Fund Facility for Sri Lanka: SDR 2.286 billion (~US$3 billion).
2023-10-01
Cabinet suspends electricity cost-recovery automatic tariff adjustment citing 'social concerns,' breaching a structural benchmark and requiring an IMF waiver.
2024-12-01
ISB bondholder exchange completed with 98 percent participation; deal includes macro-linked bonds and governance-linked bonds tied to nominal USD GDP thresholds for 2025–2027.
2025-02-28
IMF Executive Board completes Third Review; all end-December 2024 quantitative performance criteria met except the indicative target on social spending.
2025-07-02
IMF Executive Board completes Fourth Review; waivers granted for missed arrears criterion across first three reviews due to under-reporting by line ministries. Electricity tariff restoration fulfilled as a prior action after approximately four-month delay.
2025-10-14
Human Rights Watch publishes report documenting tax exemptions for 24 Port City companies approved in breach of IMF program conditionality; notes neither government nor IMF responded to August 2025 inquiry.
2025-12-01
A coalition of 38 Sri Lankan civil society organisations calls for renegotiation of IMF loan conditions.
2026-05-27
IMF Executive Board completes combined Fifth and Sixth Reviews; all end-December 2025 quantitative targets met; waivers granted for two continuous performance criteria (external payment arrears and import restrictions). US$695 million disbursed.

Key claims & status

The zero-ceiling quantitative performance criterion on central government expenditure arrears was missed across the first three EFF reviews due to under-reporting by line ministries and misinterpretation of the program's technical memorandum definition.

supported

Confirmed by IMF Fourth Review staff report and press briefing; waivers of non-observance were formally granted by the IMF Executive Board.

International Monetary Fund (Press Release) International Monetary Fund (Staff Country Report) Newswire (Sri Lanka)

The previous Sri Lankan government approved tax exemptions for 24 new Colombo Port City SEZ companies between January and September 2024, in direct breach of a binding IMF program commitment to refrain from new tax incentives.

alleged

Reported by Human Rights Watch citing an IMF staff report; neither the Sri Lankan government nor the IMF formally responded to HRW's August 2025 inquiry. The IMF staff report cited is S10/S14 but the specific exemption count is sourced via HRW's characterisation.

Human Rights Watch

Sri Lanka's fiscal adjustment since 2021 totalling nearly 8 percent of GDP was assessed by the World Bank as 'sharper and faster' than all but one episode among 330 comparable adjustments in 123 countries since 1980.

supported

Directly stated in the World Bank's September 2025 Public Finance Review press release and full report.

World Bank (primary document) World Bank (primary document)

Poverty in Sri Lanka reached 24.5 percent in 2024—approximately twice the 2019 level—according to World Bank estimates.

supported

Figures are model-based estimates; the DCS has not conducted a new Household Income and Expenditure Survey since 2019, a limitation explicitly noted by Groundviews (S40).

World Bank (primary document) World Bank (primary document) World Bank (primary document)

The precise financial terms of the China Exim Bank and Paris Club/India bilateral debt agreements were not publicly disclosed, making independent verification of comparability of treatment impossible.

supported

Confirmed by CFR senior fellow Brad Setser (S27) and the French Treasury's own account (S28); the IMF acknowledged 'challenges in the sharing of information across creditor groups' (S22).

Council on Foreign Relations Direction Générale du Trésor (French Treasury) ODI (Overseas Development Institute)

The NPP government planned to approve four additional pending tax exemption requests for Port City companies, continuing the breach of IMF conditionality.

alleged

Alleged by Human Rights Watch in October 2025; no formal government or IMF confirmation found in the sources retrieved.

Human Rights Watch

CIABOC has published no findings specifically reviewing compliance with IMF EFF structural conditionalities, and its asset declaration oversight is undermined by arbitrary redactions and the absence of a centralised electronic system.

supported

CIABOC finding from Transparency International Sri Lanka/UNCAC Coalition parallel report (S45); IMF Fifth and Sixth Reviews (S9, S10) reiterate need to uphold CIABOC independence as aspirational rather than operational.

UNCAC Coalition / Transparency International Sri Lanka International Monetary Fund (Press Release) International Monetary Fund (Staff Country Report)

Macro-linked bond upside scenarios in the ISB restructuring could mean bondholders ultimately provide less NPV debt relief than official bilateral creditors, potentially undermining the comparability-of-treatment principle.

alleged

Flagged by ODI researchers (S29) and CFR's Brad Setser (S27); the IMF acknowledged the analytical challenge but has not formally ruled on whether a breach of COT has occurred.

Council on Foreign Relations ODI (Overseas Development Institute) International Monetary Fund

Response / Right of reply

this is ok to publish

Sources

Methodology & disclaimer

This report compiles material from the cited public sources. Statements attributed to others are reported as allegations, not findings of fact. Analysis is labelled as such. To request a correction or right of reply, see our corrections page.