An Assessment of Macroeconomic Stability in Sri Lanka: Evidence from the Macroeconomic Stability Pentagon Model

Abstract

Sri Lanka experienced an unprecedented macroeconomic crisis 2022. To overcome this crisis International Monetary Fund approved Extended Fund Facility (EFF) in March 2023. The primary objective of the IMF-supported EFF programme was to restore macroeconomic stability through comprehensive fiscal, monetary, and structural reforms. As Sri Lanka approaches the final stage of the EFF programme, it is important to evaluate the extent to which macroeconomic stability has been restored. Accordingly, this study assesses Sri Lanka's macroeconomic stability using the Macroeconomic Stability Pentagon (MSP) model developed by Grzegorz W. Kołodko. The analysis was based on secondary data obtained from the Central Bank of Sri Lanka. The findings revealed that Sri Lanka experienced relatively stable macroeconomic conditions during the early 2000s, with the highest MSP value recorded in 2005. However, macroeconomic stability deteriorated significantly after 2019 due to fiscal imbalances, monetary expansion, external sector vulnerabilities, and adverse policy decisions, which were further intensified by the COVID-19 pandemic and global economic shocks. The lowest level of macroeconomic stability was observed during 2020–2022, reflecting severe internal and external imbalances. The results further indicate a substantial recovery in macroeconomic stability after 2022, largely supported by the International Monetary Fund (IMF)-backed stabilization and structural reform program. Improvements in inflation control, fiscal consolidation, exchange rate flexibility, and external sector performance contributed to the increase in the MSP index by 2025. The study concludes that although Sri Lanka has achieved significant improvements in external stability, internal stability remains comparatively weak due to moderate economic growth and persistent unemployment challenges.