Sri
Lanka 's economic crisis which was running through 2022 -23 can be indicated as
a one of the most highlighted scenarios in its history. The severe status of
Sri Lankan economy could be observed by the fuel shortages, power cuts and
spiraling inflation which drove the economy beyond its limits through
unsustainable debt and fiscal mismanagement. However, the economy is recovering
slowly with the process of debt restructuring
and reforms of IMF.
How did Sri Lanka Get here?
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This debt crisis is not an overnight incident. Various factors paved the way to the confusion that the Sri Lanka has faced.
Rising Public Debt: Debt Levels were Around 128% of GDP by 2022
Foreign
reserves decrements: With the effect of COVID 19 the tourism was severely
collapsed, declining of remittances, and rigidity of exchange rates deplete the
reserves.
Policy
missteps: In 2019 the tax was suddenly cut which caused to reduce government
revenue and the risk of repayment increased as the reliance on external
commercial borrowing.
Global
shocks: Situation was even worsened with the rising of oil prices and
disruptions of supply chain.
The Restructuring Breakthrough
Milestone
is December 2024 when Sri Lanka successfully restructured US$ 12.55 billion in
foreign debt. In this restructuring process specific financial tools were used:
- Governance linked bonds (GLBs): this was designed to reward Sri Lanka economic transparency and effectiveness by reducing interest rates on debts.
- Macro -Linked Bonds (MLBs): processing repayment terms to macro-economic performance in Sri Lanka which creates flexibility during falls.
IMF's
Crucial Role.jpeg)
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This is a topic where we cannot neglect without discussing as it is tightly linked with the turnaround of Sri Lanka as it provides the Extended Fund Facility.Us$3 billion facility (2023-2027): Provides staged disbursement tied to reforms.
By
July 2025, Sri Lanka had already drawn Us$ 1.74 billion having the most IMF
reviews.
Reforms are compromised with energy pricing adjustments, governance reforms and tax mobilization to boost state revenue. Other creditors and markets are received strong signals because of this IMF's continued support.
Debt Structure in 2025
Burden
if Sri Lanka's debt is heavy even after restructuring.
As
of 2025:
- External debt(50%): multilateral institutions, bilateral creditors, commercial bondholders.
- Domestic debt(65%): High interest payments affects to government finances.
In 2025, 13% of the GDP was indicated for debt services, but the restructuring has reduced the repayment stress.
Signs of Recovery
Economic
Growth: GDP rebounded around 5% in 2024 which was led by the tourism and
manufacturing after the 2022 contracting.
Inflation:
In February 2025 inflation has turned into negative (-4.2%) which has dropped
notably.
Credit Ratings: According to the Fitch ratings Sri Lanka has upgraded to CCC+, and the Moody's kept the Sri Lanka in rate Caa1 which is stable; still it's risky although it is a step forward.
Challenges Despite the Progress
- Domestic debt large proportion: Sri Lanka still has a large share with banks and pension funds.
- Revenue Generation: Collection of tax remains weak.
- External shocks: Global trade decrement, higher oil prices.
- Political risks
Conclusion:
A Turning Point, but not the Finish Line.
Both
the risks of unsustainable borrowing and the opportunities of reforms are
reflected by the Sri Lanka's journey through default in 2022 to the recovery in
2025.With the support of IMF the secured restructuring deals led to economy to
show signs of recovery and also, we have a second chance.
References
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