Sri Lanka entered an International Monetary Fund (IMF)-supported debt restructuring programme in 2023 following the 2022 sovereign default under Ranil Wickremesinghe’s presidency. 

The Extended Fund Facility (EFF) aimed at restoring macroeconomic stability through fiscal consolidation and structural reforms to achieve medium-term external viability and debt sustainability.

IMF reports (2025) had projected public debt at 104.6% of Gross Domestic Product (GDP) by 2026, with external restructuring nearing completion. Gross Financing Needs (GFN) before the announcement of bankruptcy, from 2013 to 2022, were 23% of GDP, and this is expected to remain at 13% of GDP per annum.

While certain macroeconomic indicators showed partial improvement, such as the return to a primary surplus of 2% of GDP in 2026, the economy remains fragile. Real wages, employment levels, poverty rates, and GDP have not recovered to their pre-crisis levels of 2019, leaving Sri Lanka vulnerable to external shocks. 

This fragility was starkly exposed by Cyclone Ditwah in late 2025, alongside recurrent floods and landslides, which significantly worsened poverty, housing insecurity, and fiscal pressures.

On 19 December 2025, the IMF approved SDR 150.5 million ($ 206 million) under the Rapid Financing Instrument (RFI), to be repaid over 3–5 years. These funds will support disaster response, essential services restoration, and infrastructure repairs.

Using World Bank data and IMF macro-fiscal indicators, I argue that Sri Lanka requires a renewed debt sustainability arrangement to align debt obligations with post-2025 realities. This analysis supports Samagi Jana Balawegaya (SJB) Leader Sajith Premadasa’s repeated appeal to the National People’s Power (NPP) Government led by the Janatha Vimukthi Peramuna (JVP) to enter into a new deal with the IMF and lenders.

Debt sustainability and IMF fiscal indicators

According to the IMF (2024), Sri Lanka’s public and State-guaranteed debt peaked at 126.3% of GDP in 2022. Despite restructuring agreements, the debt ratio is projected to remain above 100% of GDP through 2028. 

The IMF forecasts a gradual decline under strict fiscal discipline, targeting a debt stock of 95% of GDP by 2032. However, these projections assume no major exogenous shocks to the economy.

Sri Lanka achieved a primary surplus of 2.2% of GDP in 2024 and is projected to achieve 3.4% of GDP in 2025 and 2% of GDP in 2026, meeting IMF performance criteria (IMF, 2025). However, I have doubts about the primary account balance data, because a significant portion of domestic debt to local contractors and suppliers is ignored when calculating this. 

Regardless, the IMF emphasises that primary surpluses alone do not guarantee debt sustainability when GFNs remain elevated, and growth is vulnerable to shocks. Even after restructuring, interest payments are projected to absorb around 25–30% of Government revenue in the medium term (IMF, 2024).

Cyclone Ditwah fundamentally altered these assumptions and made IMF targets and forecasts unrealistic. Reconstruction spending, emergency relief, and revenue losses from disrupted economic activity directly weaken the debt sustainability path envisaged in the IMF baseline.

Poverty and vulnerability: What the World Bank says

Opposition Leader Premadasa has emphasised the need to amend the IMF programme. Given the harsh economic realities facing ordinary Sri Lankans, his calls for programme modifications are not only justified but essential.

The World Bank defines extreme poverty as income below $ 4.2 per day. Sri Lanka’s extreme poverty stood at 22.4% in 2025, with forecasts indicating this could exceed 30% by 2027, as an additional 10% risk falling into extreme poverty. Some estimates suggest up to 40% live below the poverty line.

Multidimensional Poverty Index analysis from CGIAR shows 24.5% of Sri Lankans are multidimensionally poor, with 50% facing multidimensional vulnerability and significant hardship in estate and rural areas, with health (nutrition, child mortality) and living standards (basic services, assets) as major deprivation areas.

Major contributing factors include the economic crisis, causing household poverty and declining incomes; persistently high food prices forcing families towards cheaper, less nutritious options; structural issues such as income inequalities and inadequate social protection; and climate-related disasters.

Notably, the most important aspect is that the World Bank prepared all these poverty and other indicators before Cyclone Ditwah.

The cyclone has caused an estimated $ 4.1 billion in direct physical damage to buildings and contents, agriculture, and critical infrastructure, according to a World Bank Group Global Rapid Post-Disaster Damage Estimation (GRADE, 2025). 

This damage is equivalent to about 4% of Sri Lanka’s GDP. About two million people have been affected by the cyclone. About 500,000 families have been severely damaged. These estimates significantly underestimate the total economic impact, as they exclude indirect costs such as disruptions to the tourism industry and losses to livelihoods of the public.

The cost of meeting minimum basic needs has more than doubled. In 2021, a person required Rs. 7,913 per month to cover essential expenses. Now, this figure has surged to Rs. 16,303.

The housing crisis reveals the scale of vulnerability. Before the cyclone, there were 160,000 line rooms across the country. More alarmingly, one million people, approximately 15% of the population, lack permanent shelter.

Additionally, youth unemployment has become a serious concern, with more than 20% of young people unable to find work. Countless families struggle to pay their electricity and water bills, a condition exacerbated by Cyclone Ditwah. 

In response to the devastation caused by the cyclone in December 2025, over 120 international development economists, including Nobel laureate Joseph Stiglitz, inequality expert Thomas Piketty, and economist Jayati Ghosh, have called for the immediate suspension of Sri Lanka’s external sovereign debt payments and a comprehensive new restructuring plan. 

Their demands centre on three key areas: an immediate halt to all external sovereign debt payments, a new debt restructuring framework that ensures long-term sustainability and recognises climate-driven disasters as systemic shocks, and significant debt cancellation without punitive conditions to free up resources for disaster recovery, social protection, reconstruction, and development. 

The economists emphasised that even under the IMF’s own projections, the previous debt deal gave Sri Lanka a 50% probability of default or required another restructuring, making the current crisis foreseeable rather than unexpected.

I would like to ask what the Government’s stance is on this matter.

Also, what is the benefit of the IMF-led economic model that the Government is following in the face of these acute economic problems revealed by the World Bank, which is the IMF’s sister organisation?

Why is renewed debt restructuring economically justified?

Based on IMF and World Bank evidence, renewed debt restructuring is justified because:

• Debt sustainability assumptions are no longer held after a large-scale natural disaster.
• High poverty and vulnerability constrain the social feasibility of continued fiscal tightening.
• Housing and reconstruction needs demand sustained public investment, not short-term emergency financing.
• Cost-of-living pressures reduce real incomes, undermining human capital accumulation.
• Preventive restructuring is less costly than future defaults, as emphasised in IMF debt frameworks.

Debt restructuring is therefore not a repudiation of reform but a necessary recalibration to new economic realities.

IMF press release No. 25/235 states: “The economic outlook is positive, but downside risks have increased. In case shocks materialise, the authorities should work closely with the fund to assess the impact and formulate policy responses within the contours of the programme. Steadfast programme implementation will be crucial.”

The economy is expected to grow by 2.9% in 2026, and the real growth rate, according to the IMF, will be 3.1% even in 2027. According to IMF estimates, Sri Lanka expects to have $ 14.2 billion or reserves to cover six months of imports to the country. 

Despite progress in debt restructuring negotiations, the external shock of Cyclone Ditwah has created grounds for renegotiation with multilateral and other lenders, as repeatedly urged by Opposition Leader Premadasa, to secure a fairer deal that protects the poor and middle class from excessive tax burdens.

(The writer is a Senior Professor at the University of Peradeniya)

(The views and opinions expressed in this article are those of the writer and do not necessarily reflect the official position of this publication)