IMF Aid Supports Recovery but Exposes Policy Weaknesses

Sri Lanka’s improving fiscal indicators and recovering household incomes mask deeper vulnerabilities in monetary and exchange rate policy, analysts warn. The latest IMF financing, including emergency assistance following Cyclone Ditwah, has eased immediate balance-of-payments pressure but highlighted structural weaknesses in the current framework.

The May interest rate cut reduced the country’s buffer for attracting dollar inflows, contributing to renewed rupee depreciation despite stable fundamentals. IMF-identified “external financing gaps” reflect not just debt obligations but distortions caused by low interest rates that fuel imports while weakening reserve accumulation.

Relief spending for cyclone victims, though necessary, risks adding pressure if financed through suppressed rates and liquidity injections. With potential global headwinds from US monetary easing and commodity volatility, economists caution that IMF support may only delay deeper adjustments. Sustainable stability, they argue, requires restoring monetary discipline rather than relying on repeated external financing.

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