Fund begins seventh review as the Middle East war delivers precisely the external shock it warned could undermine Sri Lanka’s recovery
An International Monetary Fund mission has arrived in Colombo to begin the seventh review of Sri Lanka’s Extended Fund Facility just as a fresh surge in the Middle East conflict has pushed Brent crude to around US$105 a barrel and sharply reduced shipping through the Strait of Hormuz.
The timing could hardly be more consequential. The IMF team led by Mission Chief Evan Papageorgiou is expected to remain in Sri Lanka until September 23, examining macroeconomic stability, reforms and the next stage of a programme that is entering its final stretch.
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But the economic landscape facing the mission is considerably more dangerous than the relatively orderly recovery Sri Lanka had hoped to consolidate.
Oil prices jumped about four per cent on Thursday, with Brent reaching approximately US$105 a barrel as attacks on shipping intensified across the Middle East. Traffic through Hormuz remains severely restricted while the conflict has increasingly threatened shipping routes extending towards the Red Sea.
For Sri Lanka, this is not an abstract international development. The IMF has already identified the Middle East conflict as one of the most serious external threats to the country’s recovery, pointing specifically to fuel imports, tourism, remittances, the exchange rate and the balance of payments.
Its calculations were stark. Sri Lanka is a net oil importer, and every US$10 increase in the price of a barrel of oil was estimated to widen the trade deficit by around 0.6 per cent of GDP. A closure of Hormuz could add a further 0.5 per cent of GDP to the deficit.
Sri Lanka also has only around one month’s typical fuel consumption in strategic petroleum reserves, while roughly half its oil imports have originated in the Middle East. That leaves the country particularly exposed if disruption becomes more severe or prolonged.
There is another uncomfortable dimension. Higher oil prices feed eventually into transport, electricity generation, manufacturing and food prices. They also increase the amount of foreign currency Sri Lanka must find simply to keep the economy running.
Temporary subsidies and relief introduced to cushion the Middle East shock were intended to be phased out as Sri Lanka returned to the fiscal path agreed under the IMF programme. Cost-reflective fuel pricing remains an important part of that structure.
The seventh review therefore confronts Colombo with a question that could not have been foreseen when some of those commitments were made: if the external shock has worsened rather than disappeared, can relief be withdrawn according to the original timetable without simply transferring the additional cost back to households and businesses?
The Government can fairly point to stronger revenue collection, improved reserves and an economy that has so far avoided anything resembling the collapse experienced in 2022. Sri Lanka has travelled a considerable distance from queues, shortages and sovereign default.
But resilience is not immunity. An economy dependent upon imported energy cannot watch one of the world’s most important oil chokepoints descend into sustained conflict without eventually paying for it.
That is why this IMF review may matter rather more than another exercise in ticking programme boxes.
The real question is whether Sri Lanka’s economic programme is sufficiently strong – and sufficiently flexible – to survive a world that has changed while it was being implemented.
Be that as it may, the numbers agreed yesterday must still work in the world that exists today.
