The International Monetary Fund (IMF) has urged Sri Lanka to maintain its economic reform programme, warning that external shocks stemming from the Middle East conflict have created fresh challenges for the country's recovery.

Concluding a week-long visit to Colombo, an IMF team led by Evan Papageorgiou said the conflict had pushed headline inflation up from 1.6% in February to 5.5% in May 2026 following higher energy prices, while tourist arrivals slowed and the pace of foreign reserve accumulation weakened.

The IMF noted that the Central Bank responded by raising policy interest rates by 100 basis points and introducing macroprudential measures, while the Government rolled out temporary subsidies for fuel, electricity and fertilizer alongside cash transfers for vulnerable households. It added that easing global commodity prices could help reduce external pressures.

The Fund stressed that Sri Lanka should continue implementing fiscal reforms to safeguard macroeconomic stability, including returning to a primary budget surplus of 2.3% of GDP in 2027. It also called for stronger tax administration, improved public financial management, faster state-owned enterprise reforms, cost-reflective energy pricing and better-targeted social safety nets.

The IMF said debt restructuring was nearing completion but urged the authorities to strengthen the Public Debt Management Office to improve debt management and support Sri Lanka's eventual return to international capital markets.

It also emphasized the need for prudent monetary policy, exchange rate flexibility, stronger financial sector safeguards and continued governance, trade and labour market reforms to attract investment, generate employment and sustain long-term economic growth.

The IMF said Sri Lanka's performance under its Extended Fund Facility programme will be formally assessed during the Seventh Review, with mission dates to be announced later.