IMF warns Sri Lanka’s recovery at risk amid looming public sector strikes

SRI LANKA’S fragile economic recovery could be hampered by threatened trade union strikes over reduced benefits for government employees in this year’s budget, the International Monetary Fund (IMF) warned on Tuesday (4).

President Anura Kumara Dissanayake’s maiden budget raised public sector salaries but also cut longstanding perks to repair the country’s tattered finances.

Sri Lanka’s main doctors’ union was considering a strike from Wednesday (5), after Eastern Eye went to press on Tuesday) to protest against cuts to their allowances, while teachers are also considering stoppages.

IMF team leader Peter Breuer said the budget was the “last big push” for Sri Lanka’s austerity programme and said everyone who can “should make a sacrifice”.

“Sticking with the reforms is really the best way out for Sri Lanka to assure its sustainability,” Breuer told reporters.

“I think it’s important for everyone in Sri Lanka to recognise that,” he said.

Breuer added that the country must boost tax compliance, improve targeting of social welfare, and smoothen capital spending to support better management of public finances.

The IMF also backed restoring cost-recovery electricity pricing to bolster finances of the island nation’s power monopoly after Sri Lanka reduced tariffs by 20 per cent in January. “At the next tariff setting it is important to ensure that tariffs are once again set to recover the cost,” Breuer said.

“Another important issue for the next review will of course be that the budget that is finally passed this month is consistent with the parameters so this is something we will be watching very carefully.”

Additionally, he said it is crucial that Sri Lanka finalises bilateral agreements with official creditors including Japan, India and China after Colombo secured a preliminary agreement on a $10 billion (£7.8bn) debt rework last June.

Sri Lanka suffered an unprecedented economic crisis in 2022 that caused widespread shortages of food, fuel and other essentials.

The country secured a $2.9bn (£2.2bn) bailout loan from the IMF in 2023, almost a year after defaulting on its $46bn (£36.1bn) foreign debt.

Successive governments have since raised taxes and cut public spending to raise state revenue.

Breuer said the next year would be less painful, but the country must remain committed to economic reforms.

“This is the last big push,” he said. “Thereafter, it will be much easier going forward.”

The IMF released last week its fourth tranche of $334 million (£262.7m) in its rescue package for Sri Lanka, commending the country for adhering to its economic reform pledges.

“Reforms in Sri Lanka are bearing fruit and the economic recovery has been remarkable,” IMF deputy managing director Kenji Okamura said in a statement at the time.

“Inflation remains low, revenue collection is improving, and reserves continue to accumulate,” he said. “The recovery is expected to continue in 2025.”

Sri Lanka’s economy is projected to have grown by 4.5 per cent last year with growth forecast at three per cent in 2025, according to latest IMF data.