COLOMBO, May 28 - The monetary stance in Sri Lanka is broadly appropriate and the country still has strong potential to reach the International Monetary Fund's 3% growth objective for the year, the IMF's mission head for Sri Lanka said on Thursday.
The comments followed an unexpected move by the Central Bank of Sri Lanka (CBSL), which increased its overnight policy rate by 100 basis points to 8.75% from 7.75%. The central bank attributed the rise to higher inflation and a weakening rupee tied to an energy price shock stemming from the U.S.-Israeli war with Iran.
Independent forecasts had suggested a milder adjustment. Seven out of a dozen economists and analysts polled ahead of the decision had expected a change closer to 25 basis points or a slightly larger tweak.
Speaking from Washington at an online press briefing, Evan Papageorgiou, IMF Mission Chief for Sri Lanka, described the monetary stance as calibrated to current conditions. He said:
"The monetary stance is broadly appropriate. Inflation is projected to remain around the 5% target, both this year and over the medium term."
On the outlook for monetary stability, Papageorgiou added:
"And now with prices stabilized and foreign reserves continuing to grow and improving as we have it in the projection, we do not see any evidence of destabilising monetary expansion."
The IMF executive board on Wednesday approved a $700 million tranche of its $2.9 billion programme with Sri Lanka. That disbursement is intended to help replenish foreign exchange buffers, which had fallen 3.8% to $6.7 billion last month as authorities struggled with rising energy import costs.
Sri Lanka, which relies entirely on imported fuel, has faced acute pressure from the energy shock. Authorities have contended with a roughly 40% increase in fuel prices, rationing measures and measures that have included public holidays on Wednesdays.
Despite the central bank's aggressive rate move, the IMF mission chief said the economy retains capacity to grow at roughly 3% this year. He pointed to recent momentum as evidence of resilience, noting that the economy expanded by 5% in 2025 and that:
"We think that there are good, very strong factors in the economy that continue to push the economic growth forward."
Those assessments come as policymakers balance the need to contain inflation and stabilize the currency while supporting a post-shock recovery. The IMF-backed financing and the central bank's tighter stance are being presented by officials as complementary steps toward restoring reserve buffers and anchoring price expectations.
While the IMF mission chief signalled confidence in the policy mix's appropriateness, ongoing developments in energy markets and currency movements remain factors to monitor as Sri Lanka implements its programme and seeks to deliver on growth targets.