Sri Lanka’s moment of reckoning may be just three years away. By 2028, the country is scheduled to restart external debt repayments in full, which is going to be a true test of resilience following its 2022 default, and a marker of whether years of fiscal reform, International Monetary Fund (IMF) support, and hard-won restructuring can deliver long-term solvency.
The outlook is more stable than it was at the height of the crisis. Reserves are recovering, inflation is down, and the rupee has strengthened. But debt remains high and the repayment obligations coming due from 2028 will challenge even the most committed reform agenda. The Government insists it is ready. The IMF agrees, conditionally. But will reality cooperate?
The timeline: Repayments resume, relief ends
Sri Lanka’s default in April 2022 triggered a sweeping effort to restructure its foreign debt, a mix of bilateral loans, commercial bonds, and official credit lines. With restructuring agreements now covering more than 97% of eligible claims, a new repayment schedule has been locked in. The grace period ends in 2027. From 2028, the bills come due.
According to IMF estimates, Sri Lanka’s external debt service obligations from 2028 onward will hover around 3.7% of Gross Domestic Product (GDP) annually. Gross financing needs, which peaked at 34.1% of GDP in 2022, are expected to fall below 13% of GDP annually between 2027 and 2032. Both metrics sit just within the IMF’s sustainability thresholds, 4.5% for forex debt service and 13% for financing needs.
These numbers suggest that Sri Lanka can meet its future obligations, but only if reforms hold and macroeconomic conditions remain favourable. Even minor slippages in growth, revenue, or reserves could upset the balance.
Poll results could prompt Govt. to reconsider agenda
Former Deputy Governor of the Central Bank of Sri Lanka (CBSL) Dr. W.A. Wijewardena cautioned that while Sri Lanka appeared to be on a steady path towards resuming debt repayments in 2028, the sustainability of that effort hinged on the Government’s continued commitment to fiscal discipline, a commitment that may come under pressure in the months ahead.
“If we continue with the fiscal and structural reforms the way we are now, then yes, we may be able to begin repaying our debt sustainably from 2028,” he told The Sunday Morning. “But it will require serious discipline on the expenditure side as well. Both revenue generation and tight control over spending must go hand in hand if we are to reduce our debt levels and build repayment capacity.”
Dr. Wijewardena warned that the recent election results could tempt the Government to ease off its reform agenda, particularly as unpopular revenue measures and spending cuts begin to carry political costs.
“The Government may fear that strict fiscal discipline will hurt its popularity,” he said. “And it cannot turn to the Central Bank for support anymore. Under the new CBSL Act, the bank is prohibited from lending to the Government or printing money at its request. So the entire fiscal responsibility now lies with the Ministry of Finance.”
That reality, he noted, presented a major downside risk. “We have already seen the Government’s popularity decline, as shown in the Local Government Election results. Therefore, there is a chance it may not want to continue with the same strict measures, either on the revenue side or by cutting expenditure.
“The problem is, even if the Government wants to deliver on its commitments, the emerging socio-political dynamics might push it to abandon fiscal discipline. That’s the downside risk. And with the Opposition already challenging these policies, it remains to be seen how far this administration can go,” he observed.
Debt restructuring: From crisis to cushion
The core of the repayment plan rests on the restructuring of Sri Lanka’s International Sovereign Bonds (ISBs), which accounted for over $ 14 billion of debt pre-crisis.
Under the new terms,
- Principal payments were deferred and maturities extended through to 2035
- Coupon rates were lowered, averaging around 4.3%
- A partial haircut was applied to the stock of debt
But most notably, a new class of instruments, Macro-Linked Bonds (MLBs), were introduced. These State-contingent bonds link repayments to Sri Lanka’s economic performance. If the economy underperforms, payments remain capped. If growth and US Dollar GDP outperform IMF baseline projections by more than 21%, only then will additional repayments be triggered.
In plain terms, Sri Lanka pays more only if it earns more. It’s a mechanism designed to reduce repayment risk while preserving upside potential for creditors.
The IMF considers the MLB structure consistent with debt sustainability, though it cautions that the thresholds for activation are high. Any economic rebound that triggers additional payments would reflect in robust export earnings, tourism, and remittances, and therefore a higher capacity to repay.
SOE reforms yet to be implemented
First Capital Holdings Chief Research and Strategy Officer Dimantha Mathew opined that the restructuring offered “temporary relief,” but stressed that “continuous reforms are essential” to make the 2028 repayment resumption sustainable. He added that while Sri Lanka had managed to maintain a primary budget surplus, “notable State-Owned Enterprise (SOE) reforms have yet to be implemented.”
Mathew also pointed out the importance of maintaining a primary budget surplus: “So far, we have managed to control debt levels through a maintained primary balance. However, notable SOE reforms are yet to be implemented, and these are important for long-term fiscal health.”
Discussing the potential risks if Sri Lanka failed to meet its debt obligations from 2028, Mathew warned: “A failure to meet these obligations could lead to a situation worse than in 2022. Having already defaulted once, investor confidence is fragile and renegotiations or restructuring would be considerably more challenging. It’s imperative that we get things right now to avoid such a scenario.”
The 4 IMF targets SL must meet
To remain in good standing with the IMF and its creditors, Sri Lanka must meet four key debt targets:
- Public debt below 95% of GDP by 2032
- Gross financing needs below 13% of GDP annually in the 2027-’32 period
- Foreign currency debt service below 4.5% of GDP every year in the 2027-’32 period
- Close a $ 17.1 billion external financing gap during 2023-’27
As of early 2025, the country is on track across all four. Public debt is projected to fall from 104.6% of GDP in 2024 to 96.8% by 2030. Reserves are building, with gross official reserves expected to reach $ 14.7 billion by 2028, enough to cover nearly six months of imports.
The fiscal side is also showing results. Sri Lanka posted a primary surplus of 2.2% of GDP in 2024 and revenue rose to 13.5% of GDP, a major improvement from just 8.4% two years earlier. If the country sustains these gains, debt ratios will continue trending down.
But the IMF has been clear, stressing that there is no room for error. Deviating from reform, reintroducing tax holidays, or weakening oversight of SOEs could quickly erode the credibility that has been rebuilt.
No further comment at this stage from MOF
When contacted for an official perspective from the Ministry of Finance, Public Debt Management Office Additional Director General Udeni Thilakarathne declined to comment on the specifics of Sri Lanka’s debt repayment preparedness.
“We are getting ready, but detailed information should come from the Treasury Secretary,” he said, adding: “As a matter of policy, departments don’t usually discuss details beyond what is already published.”
It should also be noted that all attempts by The Sunday Morning since last Monday (5) to contact Deputy Minister of Economic Development Anil Jayantha Fernando, Deputy Minister of Finance and Planning Harshana Sooriyapperuma, Treasury Secretary Mahinda Siriwardana, and related spokespersons from respective ministries proved futile.
The growth question
Economic performance will make or break the repayment plan. Real GDP grew by 4.5% in 2024, with modest but steady growth expected through the end of the decade. Inflation has stabilised, interest rates have eased, and the current account remains near balance.
Yet these forecasts are fragile. Global risks, oil price volatility, geopolitical tensions, or a slowdown in trade could dent Sri Lanka’s recovery. Domestically, any political shift away from reform could bring uncertainty.
The IMF’s baseline scenario assumes:
- 3.1% annual GDP growth from 2025 to 2030
- Tax revenue reaching 15.4% of GDP by 2028
- External debt service staying flat at 3.7% of GDP
- Forex reserves exceeding $ 15 billion by 2030
All of this adds up, on paper. But the window for implementation is short. The final stage of the IMF programme runs through 2027. From 2028, the country must stand on its own.
MLBs and governance-linked terms: Incentives for discipline
Another novel feature of Sri Lanka’s restructuring is the inclusion of Governance-Linked Bonds (GLBs). These instruments offer coupon relief, up to 0.75 percentage points, if Sri Lanka meets key fiscal and transparency milestones, including revenue targets and anti-corruption reforms.
In theory, this creates a dual incentive. The country pays less if it governs better. But it also introduces accountability. If Sri Lanka misses its governance targets, it pays more, financially and reputationally.
The combination of MLBs and governance-linked terms gives Sri Lanka some flexibility, but it does not eliminate risk. Creditors are watching closely and the IMF has tied future disbursements to strict compliance.
SL should stay committed to rebuilding reserves: IMF
Speaking to The Sunday Morning, IMF Mission Chief for Sri Lanka Evan Papageorgiou said that Sri Lanka’s ambitious reform agenda was delivering commendable outcomes.
“The post-crisis growth rebound is remarkable, inflation remains low, reserves continue to be accumulated, and revenue collection is improving. Substantial fiscal reforms have strengthened public finances. Debt restructuring in line with programme parameters is nearly complete,” he said.
He added that in order to restore debt sustainability, authorities needed to complete the debt restructuring as envisaged while sustaining fiscal discipline, revenue mobilisation efforts, and reform momentum.
“The authorities remain committed to the objectives and parameters of the IMF-supported programme, including the fiscal and debt targets. Despite the global trade policy uncertainty which poses significant downside risks to Sri Lanka’s economy, the authorities should persevere in their efforts to rebuild fiscal space and maintain macroeconomic stability by raising revenue, restoring and maintaining debt sustainability, and mitigating fiscal risks from SOEs, including through cost-recovery energy pricing,” he said.
“They should also stay committed to rebuilding foreign reserves, maintaining price stability, safeguarding financial stability, strengthening social safety nets, reducing corruption vulnerabilities, and enhancing growth,” Papageorgiou added.
Window between now and 2028 highly important
Sri Lanka has managed to emerge from the most immediate phase of its debt crisis. The restructuring has delivered real relief, the IMF programme has reimposed discipline, and the economic data, for now, is improving.
But the window between now and 2028 is highly important. If Sri Lanka can consolidate reforms, grow exports, and rebuild reserves, it may yet return to capital markets with credibility. If not, the hard-won gains of recent years could unravel and a second default could be even harder to escape.
SL’s financial metrics
