As Sri Lanka is to be faced with elevated interest rates once it re-enters international capital markets in 2027, due to its low credit ratings, a consecutive International Monetary Fund (IMF) agreement appears to be a viable alternative, Emeritus Professor Premachandra Athukorala said, speaking on a webinar LEADS Sri Lanka hosted on Sunday (12).
“According to the IMF programme, Sri Lanka is expected to regain access to world capital markets. In 2027, they are expected to borrow $ 1.5 billion. But how can you borrow at a concessionary rate simply because the credit rating agencies have not increased our credit rating?” Athukorala said, referring to the envisaged bond issuance.
“Entering into a successive IMF agreement would be a better alternative, and some policymakers have already started here,” Athukorala said.
Though Sri Lanka’s current credit ratings stand at CCC+ with a stable outlook from S&P and Fitch Ratings, the country remains in a speculative category, indicative of high risk, amidst recovering stability.
“Standard & Poor’s and Fitch International say very high credit risk, and Moody’s says extremely high. If we go to the world capital market, the interest rate we have to pay would be between 11-14%,” Athukorala said.
More recently, experts have indicated that Sri Lanka’s 2035 International Sovereign Bond (ISB) continues to trade at a yield of about 8.3%, compared with roughly 4.3% on comparable US Treasury securities, reflecting that investors continue to price Sri Lanka as a high-risk borrower.
“Therefore, going to the capital market to raise more debt in order to roll out debt is virtually gone. It is closed,” Athukorala added. He added that as total public debt is projected to reach $ 180 billion, about 96% of GDP by 2027, with foreign debt expected to be approximately $ 53 billion.
In May 2026, with the completion of the fifth and sixth reviews of the EFF programme, the multilateral outlined that its projection for Sri Lanka’s gross official reserves was $ 11.779 billion by 2027. Between May and June this year, gross official foreign reserves declined by 6.5%, from posting $ 6.881 billion in May, to $ 6.431 billion in June, according to the Central Bank of Sri Lanka data.
Athukorala said that Sri Lanka’s current reserves position does not suffice against the target, even with a potential effort to increase government taxation revenue, in the time being.
“The IMF predicts that total foreign reserves have to be about $ 12 billion by 2027 if you want to manage the debt as well as to cushion the economy against external shocks. But so far, net foreign exchange reserves have been only about $ 5.4 billion. Increasing from $ 5.4 billion to $ 12 billion within one year is a Herculean task.”
“Even if the Government increases tax revenue and achieves a primary surplus, the surplus in rupees, you need to convert it into foreign exchange in order to repay it. But foreign reserve levels in Sri Lanka are still well below the required level.”
“According to the IMF indicator of reserve adequacy, still our reserves adequacy is well below 100% – about 45%. Achieving 100% is going to be a difficult thing.”
He further noted that though performance under the programme was generally strong, unmanageable debt ‘overhang’ would remain a concern, long after the programme is to come to an end.
“Performance under the programme was generally strong... with the important caveat that debt sustainability risk remains high.”
“The programme was designed to achieve macroeconomic stability and at the same time achieve debt sustainability. We have a debt overhang, but the overhang should be of the nature that helps the country to manage it smoothly without further heavy borrowings. That has not been achieved.”
“The IMF money is not only cheap, but the IMF certificate is important to borrow from bilateral donor countries as well as from the World Bank and ADB. In other words, the IMF agreement is not only cheap money, it has a catalytic effect for raising funds from other sources,” Athukorala said.