Sustaining Sri Lanka's reforms critical to safe-guarding macroeconomic stability, IMF says

(Reuters) -Sustaining Sri Lanka's reform momentum is critical to safeguarding the country's macroeconomic stability, the International Monetary Fund said on Friday after its staff concluded a visit to the island nation.

Supported by a $2.9 billion programme from the global lender, Sri Lanka is gradually recovering from its worst financial crisis in decades, triggered by a record dollar shortage three years ago.

Sri Lanka's economy grew by 5% last year and the World Bank predicts it will post 3.5% growth in 2025.

But the island nation needs to tackle global headwinds from 30% U.S. tariffs, which could impact about $3 billion in exports. Colombo is in talks with Washington to attempt to reduce the tariff rate before it is implemented on August 1.

“While the economic outlook is positive, downside risks have increased on the back of potentially high tariffs on Sri Lanka’s exports, persistent trade policy uncertainty, and heightened geopolitical tensions," Evan Papageorgiou, IMF Mission Chief for Sri Lanka, said in a statement after wrapping up a visit to Colombo this week.

Any shocks from the U.S. tariffs will be addressed within the IMF programme, he added.

Sri Lanka's upcoming budget, expected to be presented to parliament in November, will need to include stronger tax revenues and lower public spending to maintain a primary balance target of 2.3% of GDP in the medium-term, the IMF said.

"Monetary policy should remain prudent and prioritise price stability," the statement said backing continued central bank independence.

Sri Lanka held its benchmark interest rate steady at 7.75% on Wednesday, but the central bank chief said further easing was possible as the island nation awaits the outcome of tariff talks with the U.S.

Apparel, Sri Lanka's second-largest foreign exchange earner, is particularly exposed — the sector exports 40% of its output to the U.S. and brought in $4.8 billion last year. It employs around 300,000 people, most of them women.

(Reporting by Shilpa Jamkhandikar; Editing by Jacqueline Wong and Raju Gopalakrishnan)

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