WASHINGTON: Sri Lanka’s recovery from its worst economic meltdown is under threat from the effects of the Middle East war, the International Monetary Fund said Thursday (May 28), a day after granting a US$695-million bailout instalment.

Tough economic reforms since Sri Lanka’s sovereign default in 2022 have placed the country in a better position, IMF mission chief Evan Papageorgiou told a news conference in Washington.

But the Iran war as well as the aftermath of Cyclone Ditwah, which struck in November, “are weighing on the economy and have tilted the risks firmly to the downside,” Papageorgiou said.

Surging oil prices due to the war, launched by the United States and Israel on Feb 28, have heavily impacted many import-dependent Asian countries including Sri Lanka.

The island secured a US$2.9-billion, four-year bailout in early 2023 after months of acute shortages in the previous year led to street protests that toppled then-president Gotabaya Rajapaksa.

The IMF’s board approved on Wednesday two reviews of Sri Lanka’s loan programme, making US$695 million in additional loans immediately available.

The IMF programme has forced the island to raise taxes, cut subsidies and introduce tough anti-corruption laws to stabilise the economy and restructure external debt.

Papageorgiou said economic reforms had paid off and Sri Lanka was in a much stronger position to deal with the current crisis, but must hold the course and “safeguard the hard-won gains.”