Though Sri Lanka has met the International Monetary Fund’s (IMF) 2032 debt-to-GDP target seven years earlier than projected, its debt sustainability hinges on its ability to avoid deviating from existing policy and navigating external shocks and disruptions to debt restructuring – which have the potential to reverse gains, First Capital’s research unit noted in its latest report on the IMF’s Fifth and Sixth review report.
“Debt-to-GDP (central government) declined from 116% to 96.8% over 2022-2025. Sri Lanka reached the 95% IMF target by 2025 – seven years early. However, the IMF cautions that sustainability is restored only under the baseline scenario,” the unit said, emphasising the fragility of Sri Lanka's debt position, in view of its progress made under the IMF program, and with external debt obligations arising ahead.
“Risks remain elevated, with progress dependent on continued reforms; any policy slippage, external shocks, or disruptions to debt restructuring could reverse these gains.”
Over the period of three years, between 2022 and 2025, Sri Lanka was able to reduce public debt-to-GDP from 125.8% to 101.1%, and central Government debt from 116% to 96.8%. Further, gross financing needs declined from 33.9% to 19.0% during this period, along with interest-to-revenue ratios falling from 79% to 46%, the research unit noted.
Projecting ahead, the research unit noted that underlying risks remain elevated between 2027 and 2028, as the nation is to face significantly larger debt obligations arising from the restructured debt, necessitating borrowing from international sovereign bond (ISB) markets for the first time since its 2022 default.
“A key inflection point is 2027-2028, where external financing needs rise sharply alongside reliance on new ISB issuance. This underlines a core risk: reserve accumulation and external stability depend heavily on sustained market access and successful financing operation.”
The unit further noted that though financing conditions have improved for Sri Lanka since its default and recovery, its first ISB issuance will be pivotal in deciding whether investors have confidence in Sri Lanka now. “Sri Lanka has stabilised, but vulnerabilities remain elevated across key areas. Financing conditions have improved, but 2027 ISB issuance will be the first real test of market confidence. Debt is declining but remains fragile with risks building post-2028.”