IMF clears $345 million payout for Sri Lanka, flags energy prices and El Nino as recovery risks
The International Monetary Fund (IMF) said on Monday, October 5, 2026, that it had reached a preliminary agreement with Sri Lanka, clearing the way for the island nation to draw about $345 million from its $2.9 billion support programme.
The agreement is the latest milestone in Sri Lanka's recovery from its worst economic crisis, which culminated in a sovereign default on $46 billion of external debt in 2022. The country secured a four-year, $2.9 billion IMF package in 2023. The latest disbursement is expected to be the penultimate one under the programme, which is due to expire in March 2027.
Agreements of this kind are reached at the staff level and normally require approval by the IMF's Executive Board before funds are released. The Fund did not indicate when the Board would consider the review.
"Sri Lanka's economy has proved remarkably resilient to successive shocks," the Washington-based lender said in a statement. It noted that the economy had recorded 11 consecutive quarters of expansion after contracting 7.3% in 2022.
The 2022 crisis brought severe shortages of fuel, food and medicines, long power cuts and record inflation, and set off mass protests calling for political change. As part of the IMF-backed programme, Sri Lanka has been negotiating a restructuring of its external debt with bilateral creditors and private bondholders, a process the Fund has tied to its disbursements.
Even so, the IMF said the recovery "continues to face downside risks from uncertainty over the duration and intensity of the Middle East war, global trade policy, and the impact of El Nino." Higher energy prices, it warned, could feed through into broader inflation. El Nino refers to a periodic warming of the central and eastern Pacific Ocean that is associated with erratic rainfall and can affect agriculture and hydropower generation in South Asia.
Diesel subsidy criticised
The IMF also criticised the government's decision earlier this month to reinstate a $126 million diesel subsidy. It said fuel prices should continue to adjust in line with international markets, while vulnerable households should be shielded through targeted support rather than broad price subsidies. The Fund has consistently argued that untargeted subsidies strain public finances and blunt the incentive to use energy efficiently.
On monetary policy, the IMF said the central bank should be prepared to tighten further if higher energy prices triggered a second round of inflation. Sri Lanka's central bank recently raised interest rates by 100 basis points, to 8.75%, but has resisted calls for further increases, arguing that they could undermine growth.
Sri Lankan authorities have yet to decide whether they will seek a new arrangement with the IMF when the current programme ends in March 2027. Until then, the Fund is expected to continue its regular reviews, with each successful assessment unlocking the next slice of financing.
