Sri Lanka’s debt problem did not pause in 2022, nor does it begin anew in 2028. What happened instead was a restructuring of time. Through one of the longest sovereign debt workouts in modern history, the country deferred repayments, negotiated concessions, and secured fiscal breathing room. But it did not earn immunity.
By 2028, the grace period will expire and full external debt repayments will resume. The real question now is whether Sri Lanka can use the remaining years to rebuild its economic engine and credibility.
That question frames the International Monetary Fund’s (IMF) scheduled visit to Colombo this year. The macroeconomic indicators suggest progress: inflation has collapsed, foreign reserves are rising, and a modest growth rebound is underway. But underneath, investment is stagnating, tourism remains underwhelming, and exports are vulnerable to global shocks.
The myth of 2028
The widespread belief that Sri Lanka’s repayments begin in 2028 is only half true. Verité Research Lead Economist Raj Prabu Rajakulendran noted: “We have current account surpluses, but that doesn’t mean we’re not paying debt. Most of our repayments post-2028 are to multilaterals like the World Bank and IMF. Commercial debt, about 30–32% of our repayments, is the real issue.”
Sri Lanka has continued to service multilateral and bilateral loans even after its April 2022 default, using IMF disbursements, fresh bilateral financing, and ongoing project loan inflows. According to the Verité Research Debt Update (July 2025), 35% of restructured repayments in Net Present Value (NPV) terms and 72% in nominal terms were pushed beyond 2030.
Restructuring a crisis
Sri Lanka’s sovereign debt restructuring took 983 days to complete, making it the third-longest since 2010. Under the terms finalised in December 2024, the country exchanged $ 12.5 billion in International Sovereign Bonds (ISBs) for a mix of five new bond types, led by Macro-Linked Bonds (MLBs) and Governance-Linked Bonds (GLBs), according to Verité.
The MLBs, which account for 56.7% of the restructured ISBs, tie debt service to Sri Lanka’s economic performance. If growth outpaces IMF projections, repayments increase. If growth underperforms, obligations remain capped.
The GLBs, meanwhile, reduce coupon payments by 75 basis points if Sri Lanka achieves 20 governance milestones by November 2028. These include revenue-to-GDP targets and the publication of annual fiscal strategy statements.
Together, these instruments aim to preserve upside for creditors while providing downside protection for the country. But they also introduce hard-coded deadlines. Sri Lanka must meet fiscal, governance, and growth benchmarks, or face higher costs.
IMF thresholds and targets
To retain IMF support, Sri Lanka must remain within four strict thresholds:
- Public debt below 95% of GDP by 2032
- Gross Financing Needs (GFN) under 13% of GDP annually between 2027 and 2032
- Foreign debt service below 4.5% of GDP during the same period
- Bridging a $ 17.1 billion external financing gap by 2027
According to the Ministry of Finance’s January 2025 briefing, the Government is on track. Public debt is projected to fall from 104.6% of GDP in 2024 to 93% by 2032, while gross reserves are expected to exceed $ 15 billion by the end of the decade.
Sri Lanka also posted a primary surplus of 2.2% of GDP in 2024, a sharp reversal from its 2021 deficit of 5.7%. Revenue rose to 13.5% of GDP in 2024, up from 8.4% in 2022. But the IMF has repeatedly warned that these gains must be consolidated and expanded.
Investment drought and a hollow growth base
The core risk to Sri Lanka’s repayment readiness is not its fiscal metrics. It is its lack of productive, non-debt-creating inflows.
Despite a few years of reforms, Foreign Direct Investment (FDI) has remained weak. “Even before the crisis, even before the lockdown, investment was slow,” said Rajakulendran. “If investments aren’t coming in, we’ll need to take on more debt. It’s either debt or non-debt inflows; those are the options.”
He cautioned against over-reliance on tax holidays as a remedy. “Tax exemptions are not the solution. Investors look for predictability, clear rules, and a stable macroeconomic environment. The idea of ‘hygiene factors’ – ease of doing business, licence processing, and legal clarity – is more important.”
The IMF, in its July 2025 Financing Assurances Review, also flagged these concerns. It noted that the Colombo Port City Economic Commission (CPCEC) had issued tax exemptions to 24 companies without prior consultation, violating programme conditions.
In response, the Government amended the CPCEC Act to create a rules-based framework for investment incentives. Deputy Minister of Industry and Entrepreneurship Development Chathuranga Abeysinghe told Parliament: “There was no standardisation on how we bring these incentives in. This amendment makes the regulations clear and standard for the global context.”
Until new frameworks are in place, the Government has pledged to refrain from granting further tax exemptions.
Multilaterals versus markets
Another structural challenge is the composition of Sri Lanka’s debt. The majority of repayments post-2028 are owed to multilateral and bilateral lenders, such as the IMF, World Bank, and China’s Export-Import (Exim) Bank.
These institutions typically offer grace periods and continue lending while repayments are made. But commercial lenders, including international bondholders, require hard currency outflows and offer no corresponding inflows unless new debt is issued.
This creates a pressure point. “We sometimes use new debt to repay old debt,” said Rajakulendran. “But commercial debt doesn’t recycle itself. That’s where the real strain will be.”
To illustrate the challenge, Verité Research notes that while Sri Lanka’s pre-restructuring ISB debt was due to be fully repaid by 2030, it is now extended through 2043. The NPV of repayments due before 2030 fell by 68%, while post-2030 obligations rose by 35%.
Sri Lanka’s ability to service this long tail of debt will depend heavily on whether it can attract private capital and export its way out of the hole.
Tourism, exports and remittances
With FDI muted, Sri Lanka’s reserve accumulation hinges on three sources: exports, worker remittances, and tourism. Among these, remittances have proven the most resilient.
Rajakulendran noted: “Worker remittances contribute a lot more than tourism does. But the ideal situation is where all three grow and we haven’t seen that.”
In 2024, real GDP growth reached 4.5%, led by export manufacturing and agriculture. But services, especially tourism, lagged. Global travel volatility, regional competition, and safety concerns continue to hold back arrivals and revenue.
Meanwhile, remittances stabilised at pre-crisis levels, aided by stronger formal channel usage and favourable currency conditions.
The IMF baseline assumes 3.1% average growth from 2025–’30 and tax revenue of 15.4% of GDP by 2028. But as officials acknowledge, even minor shocks could jeopardise these projections.
Cyclone Ditwah and disaster risk
One such shock materialised in November 2025. Cyclone Ditwah, the worst climate disaster in over a decade, caused an estimated $ 4.1 billion in direct physical damage, affecting all 25 districts.
The World Bank’s Global Rapid Post-Disaster Damage Estimation (GRADE) report identified $ 1.7 billion in infrastructure losses, $ 985 million in residential damage, and $ 814 million in agricultural damage.
A group of 120 international economists, including Joseph Stiglitz, has since called for a new round of restructuring to account for this unexpected fiscal burden. But Sri Lankan analysts remain divided.
Verité’s Rajakulendran said: “This is more about pointing out Sri Lanka’s vulnerability to climate risk. Our debt doesn’t have disaster clauses, so any relief has to be renegotiated.”
Frontier Research Head of Macroeconomic Advisory Chayu Damsinghe echoed this sentiment, noting: “The World Bank damage estimates are not the same as immediate fiscal costs. Recovery will be spread over years, so I don’t think we need to revisit the restructuring just yet.”
Political fault lines
The biggest short-term risk to Sri Lanka’s reform agenda may be political. Former Deputy Governor of the Central Bank of Sri Lanka (CBSL) Dr. W.A. Wijewardena warned that the recent Local Government Election results showed declining Government popularity, raising the temptation to ease fiscal discipline.
“The Government may fear that strict reforms will hurt its popularity,” he told The Sunday Morning recently. “But under the new CBSL Act, the Central Bank can no longer lend to the Government. So the burden falls entirely on the Treasury.”
That burden could grow heavier in the lead-up to national elections. Spending pressures, social protection demands, and resistance to tax hikes could all derail the delicate fiscal balance.
What happens if SL slips?
If Sri Lanka fails to meet its post-2028 obligations, the consequences could be severe. First Capital Chief Research and Strategy Officer Dimantha Mathew noted: “A failure to meet these obligations could lead to a situation worse than 2022. Having already defaulted once, investor confidence is fragile.”
Re-entering default would likely trigger downgrades, outflows, and a loss of credibility. It could also limit future access to commercial credit markets, critical for refinancing existing obligations.
That is why the IMF has tied future disbursements to strict compliance. As IMF Mission Chief for Sri Lanka Evan Papageorgiou stated, Sri Lanka must “stay committed to rebuilding reserves, safeguarding financial stability, and reducing corruption vulnerabilities”.
The next three years
Sri Lanka has exited its immediate crisis. But the road to long-term solvency runs through the next three years.
The IMF programme ends in 2027. From 2028, the country must service restructured debts with its own revenue and reserves. It depends on investment flows, policy discipline, and institutional credibility. The path is open, but time is closing in.