Sri Lanka budget faces post-IMF test as energy costs bite

COLOMBO, Nov 6 : Sri Lanka will use next week's budget to convince investors its economic recovery can outlast a four-year International Monetary Fund bailout that is nearing an end, while trying to revive growth and cushion households from surging energy prices.

President Anura Kumara Dissanayake, who also holds the finance portfolio, will present the budget for 2027 on November 12, laying the groundwork for the island nation's return to bond markets after exiting a $2.9 billion IMF programme in March.

His challenge will be to shift the economy from crisis-era stabilisation towards stronger investment and growth without undermining the fiscal discipline that helped pull the country back from its worst economic crisis in decades.

Sri Lanka's turnaround since 2022 has been stark.

It went from running out of foreign exchange, struggling to import fuel, food and medicines and defaulting on its foreign debt to rebuilding reserves and recording sustained economic growth.

The economic collapse also triggered mass street protests that forced then-President Gotabaya Rajapaksa to flee the country and resign after demonstrators stormed his official residence, bringing an abrupt end to a presidency dominated by his powerful family.

The economy has now expanded for 12 consecutive quarters, while gross official reserves reached $6.9 billion by the end of October.

"No country has ever done enough," said Evan Papageorgiou, the IMF's mission chief for Sri Lanka, in an interview. "So let's put it like this - Sri Lanka has done quite a lot, but more needs to be done so that this transformation can go from stabilization to prosperity."

"We think the central test is whether the budget safeguards fiscal and debt sustainability while still creating space for the development priorities we'll be discussing."

Sri Lanka approaches the budget unveiling with stronger public finances after recording a primary surplus of 5.4 per cent of gross domestic product in 2025. The government's fiscal strategy targets a 2.6 per cent surplus in 2027 and seeks to narrow the overall deficit to 4.5 per cent of GDP.

The government is targeting revenue and grants of 15.5 per cent of GDP, including tax revenue of 14.2 per cent, while keeping public investment above 4 per cent of GDP.

But Dissanayake is also under pressure to protect households from inflation after the US-Israeli war on Iran pushed up energy costs. Inflation in Colombo, the capital, accelerated to 8.3 per cent in October.

The government has already rolled out fuel and electricity subsidies, cash assistance to low-income households and support for farmers and fishermen.

POST-IMF PRESSURES

Despite the rebound, the World Bank says the recovery remains "incomplete and uneven." It expects growth of 4.4 per cent this year and 4.2 per cent in 2027, while the poverty level, estimated at 16.9 per cent in 2025, remains above pre-crisis levels.

"There's a need to really begin to shift towards a different type of growth model," said Jakob Engel, a senior country economist at the World Bank, calling for a move from public investment and debt-driven growth towards private-sector investment, exports and productivity.

The budget is also a condition for completing the seventh review of the IMF programme, which would unlock about $345 million and take total disbursements to around $2.7 billion.

Investor confidence has improved, with Fitch Ratings upgrading Sri Lanka to B-minus from CCC-plus in September, citing stronger fiscal and external balances, reforms and rebuilding reserves. But it warned debt and debt-service burdens remained high.

Sri Lanka, which last issued international bonds in 2019, could still face steep borrowing costs.

Economist and former central bank Deputy Governor W.A. Wijewardena estimated borrowing costs could reach 11 per cent to 12 per cent.

"This is not an affordable interest rate for a country like Sri Lanka," he said. "If we have to borrow at these rates, we will be driven back into the old debt trap."