Sri Lanka and IMF: The subscription economy

By Dhananath Fernando

Originally appeared on The Morning

Last week, former Chief Economic Adviser to the Government of India Arvind Subramanian delivered a talk organised by a local media outlet and repeated a message this column has been making for years. Sri Lanka has become a permanent client of the International Monetary Fund (IMF). His uncomfortable question was simple: have we really addressed the reasons we keep returning to the IMF?

The IMF is not the problem. The real problem is what we repeatedly do, and fail to do, that pushes us back to the IMF. We postpone reforms. We dilute reforms. We announce reforms and then negotiate with ourselves until nothing meaningful remains. That is how a country ends up treating the IMF like a recurring subscription, not a last-resort lender.

We are now back again, for what feels like the umpteenth time, still asking for breathing space while keeping the deeper structural issues on hold. The tragedy is not the programme. The tragedy is the pattern.

One of Subramanian’s most important warnings was about memory. Sri Lankans must not forget the economic crisis. Most reforms we managed to pass were done at the height of pain, when denial was no longer possible. Once the pain fades, our political system starts behaving as if the crisis was a bad dream, not a diagnosis. History shows that when we forget the lesson, we repeat the bill.

To be fair, this time we do have a few structural reforms in place. The Central Bank of Sri Lanka’s greater independence, the Public Debt Management Office and framework, the fuel price formula, the Public Financial Management Act, and the Anti-Corruption Act are steps that bring more discipline to the system. They help reduce policy chaos. They improve predictability. They can strengthen credibility.

But we must be clear about what they are, and what they are not. Stability is not reform. Stability is not the same as growth. Stability is the floor, not the ceiling. It prevents the economy from collapsing again. It does not automatically make the economy expand.

Subramanian also stressed something that Sri Lanka often tries to ignore: stability has to be continuously defended through reforms. Without economic stability, growth is simply impossible. As the saying goes, stability is not everything, but without stability everything is nothing.

Yet even if we get stability right, we cannot ignore the fundamental shift happening in our demography, which will shape every economic outcome over the next decade. Our labour force is ageing and our population is shrinking. That means a smaller base of working people will have to carry a larger burden: elderly citizens who need care and income security, and younger citizens who still need education and investment. If productivity does not rise, the arithmetic will not work.

The outlook becomes even more worrying when we look at how our labour migration patterns are changing. We proudly celebrate rising remittances, and the headline numbers look comforting. But the composition behind those numbers tells a more serious story. The old perception that Sri Lanka’s out-migration is mainly unskilled women leaving for domestic work is no longer accurate. Increasingly, our out-migration is skilled and male.

Recent quarterly trends show that it is largely skilled males in the prime working-age bracket who are leaving. And when we look at destinations, with a few exceptions, the pattern again points to a labour export profile dominated by skilled men. In simple terms, the country is losing the very workforce it needs for growth, productivity, and tax revenue.

At the same time, we are failing to solve the long-standing problem of low female labour force participation. We have discussed this for years. We have had commissions, reports, policy notes, and conferences. The conclusions are broadly consistent. But the reforms remain stuck.

Contributory pension schemes that create portability and security, flexible work arrangements that fit modern households, clear part-time work regulations, and enabling rules for gig and platform work are not ‘nice to haves.’ They are core reforms for an ageing society with a shrinking workforce. Delaying them is not neutral. The costs will show up through slow growth, weaker productivity, and a narrower tax base.

These are the kinds of reforms Subramanian may not have listed one by one, but his point was clear: we have not done a good job of getting the right things done to ensure we do not return to the IMF again.

Both economic stability and economic growth are difficult games to play. The danger is thinking we can remain stable without growing. Stability cannot be sustained without growth. But growth also cannot be achieved without reforms, and reforms create political pressure, which can tempt governments to return to short-term populism and policy reversals. That push and pull is the real challenge.

This is a delicate balance, and failing to manage it will cost us dearly: by eroding hard-earned wealth, weakening institutions, and drifting back into crisis. Or, as Subramanian bluntly framed it, drifting back to the IMF.

The IMF is not the problem. What we keep doing to end up back there is the problem.

Departures for foreign employment

Source: CBSL, JB Securities Research 

Composition of total departures for foreign employment: Jan.–Sept. 2025

Source: CBSL, JB Securities Research 

Total departures for foreign employment by age and gender: Jan.–Sept. 2025

Source: CBSL, JB Securities Research

Fuel deal without bidding sparks fears of economic instability

By Dhananath Fernando

Originally appeared on the Morning

On Wednesday (16), a daily newspaper reported that the new Government was planning to strike a fuel supply deal between the Ceylon Petroleum Corporation (CPC) and the Ceylon Electricity Board (CEB) for power generation.

Following this report, there was significant discussion on social media questioning why the Government would deviate from the competitive bidding process (a few Government representatives have personally informed us over the phone that the facts in the news story are incorrect and that the Government plans to clarify details through a press conference).

If the news is true, it would mean that the CEB would no longer engage in competitive bidding when purchasing fuel from the CPC. Fuel purchases, including hydrocarbons like naphtha and heavy fuel oil, are key input costs in electricity generation.

Regardless of the news story’s accuracy, the main concern for businesses is that bypassing the competitive bidding process in fuel procurement could lead to significant risks for CPC and CEB financial stability with corruption vulnerabilities. If the CPC and CEB start incurring losses or attempt to cover up losses by increasing tariffs, it could destabilise the economy.

To put this into perspective, the CPC’s revenue for 2023 was approximately Rs. 1,300 billion and the CEB’s about Rs. 679 billion. In comparison, Sri Lanka’s total tax revenue, including Value-Added Tax (VAT) for 2023, was around Rs. 3,000 billion.

Together, these two institutions manage a cash inflow that amounts to nearly two-thirds of the country’s total tax revenue. Even a minor financial misstep could result in a major crisis for the Government, leading to a complete economic collapse.

Avoiding the competitive bidding process creates a vulnerability to corruption. Competition is a crucial tool for preventing corruption, as it automatically introduces checks and balances through price signals on the supplier side. Without competitive bidding, any corruption within the CPC or CEB would likely manifest as significant financial losses in their balance sheets. Unlike other institutions, losses at the CPC and CEB have massive spillover effects, as has been seen under successive governments.

Typically, the CPC sells naphtha – a byproduct of its refinery – at a price higher than the market rate to the CEB. This is one way the CPC tries to offset its own inefficiencies or cover losses when the Government mandates fuel sales below production cost. However, when the CPC charges more for naphtha, electricity generation becomes more expensive, prompting the CEB to seek tariff increases.

On top of this, the CEB often delays payments to the CPC when it experiences losses, which forces the latter to borrow money from banks at high interest rates. These costs, in turn, are passed on to consumers, affecting industries across the board – from rice mills to poultry farms and even hotel operations, as energy costs are a major expense (CEB tariff hikes impact the water bill and many other industries, including through increasing inflation).

The CPC also sells jet fuel to SriLankan Airlines at inflated prices, similar to how it overcharges the CEB for naphtha. Jet fuel is a significant cost for the aviation industry and the high prices can push airlines into losses. When the CPC, CEB, and SriLankan Airlines all incur losses, they ultimately turn to the Treasury for bailouts.

It is no secret that the Treasury’s budget deficit has remained massive for years, compared to the country’s GDP. Consequently, the Government then turns to State-owned banks like the Bank of Ceylon (BOC) and People’s Bank (PB) to cover the losses. In many cases, the Government provides Treasury guarantees, sometimes even in US Dollars, for fuel purchases.

These banks, in turn, are forced to lend depositors’ money to these institutions, often at a high risk due to the prime lending rates. Ultimately, the financial mismanagement of the CPC and CEB trickles down to depositors’ hard-earned savings.

In the last Budget, the Government allocated Rs. 450 billion, equivalent to three years of Advance Personal Income Tax (APIT, previously the Pay-As-You-Earn [PAYE] tax), to recapitalise the banking sector, mainly with State banks. In addition, the Government absorbed $ 510 million into the Treasury to address losses at SriLankan Airlines, largely caused by the CPC’s inflated prices.

If the CPC indeed moves away from competitive bidding, it is a clear signal of poor governance and a warning of future economic hardship, potentially affecting depositors’ savings. When the CPC and CEB incur losses, the Government typically has to either increase the prices of electricity and fuel beyond what is set by price formulas or continue providing subsidies – both of which lead to higher taxes or interference with key economic indicators, thus creating political pressure.

This cycle has been ongoing for years, which is why the business community and others are deeply concerned about the CPC leaving the competitive bidding process. If the news is false, we can be relieved. But it is essential to understand the grave risks of abandoning competitive bidding, as it extends far beyond corruption; it threatens to bring about complete financial instability.