IMF says Sri Lanka economy grows 4.2% despite oil shock and global risks

The IMF said Sri Lanka's economy grew 4.2 per cent in the second quarter despite fresh shocks. It warned that inflation, global uncertainty and climate-linked risks still demand firm reforms and stronger safety nets.Image used for representational purposes onlySri Lanka's economy remained resilient despite successive shocks, with economic activity expanding 4.2 per cent in the second quarter of 2026, the International Monetary Fund said on Wednesday. The IMF said this was the 11th consecutive quarter of strong economic expansion, while warning that risks remain from the conflict in West Asia, global trade policy uncertainty and the impact of El Nino.In a statement issued at the end of its September 10-23 mission to Sri Lanka, the IMF said headline inflation rose to 8 per cent year-on-year in August because of the global oil price shock, but expectations were still broadly anchored. It added that gross official reserves had increased to USD 6.9 billion at the end of August 2026, while banks remained well capitalised and profitable.The IMF said, "While headline inflation rose to 8 per cent year-on-year in August due to the global oil price shock, expectations are broadly anchored. Gross official reserves have increased, reaching US$6.9 billion at end-August 2026. Banks remain well capitalised and profitable."At the same time, it cautioned that, "Safeguarding macroeconomic stability in a shock-prone environment requires unwavering commitment to prudent policies and reforms to rebuild fiscal and external buffers, maintain price stability, and advance the governance agenda while strengthening social safety nets to protect the most vulnerable." The IMF said it would be critical to develop and implement a medium-term revenue strategy to sustain revenue mobilisation while improving the efficiency and fairness of the tax system. It added, "Steadfast efforts are needed to broaden the tax base and rationalise tax exemptions and incentives," and said it would be prudent to maintain the 5 per cent inflation target.The IMF team also visited Jaffna and said it learned first-hand about the economic potential of the Northern Province. Discussions with the private sector and civil society pointed to opportunities to unlock growth and create jobs through investment in connectivity, skills, and sectors such as agriculture, fisheries, tourism and renewable energy. It also called for stronger social protection so that the gains from Sri Lanka's economic transformation are shared more widely. Overall, the IMF said Sri Lanka's economy had continued to expand strongly, supported by higher reserves and stable financial sector conditions, even as it urged the country to stay committed to reforms, prudent policies, tax measures and stronger social safety nets.With PTI Inputs- EndsPublished By: India Today Web Desk Published On: Sep 23, 2026 12:48 IST