Sri Lanka’s debt settlement, completed in 2024 after nearly two years of negotiations following the country’s 2022 default, has come under renewed discussion in the aftermath of Cyclone Ditwah.
The debate was revived after a group of more than 120 international economists, including Nobel Prize winner Joseph Stiglitz, called for Sri Lanka’s external debt payments to be suspended and for fresh restructuring talks to be initiated, arguing that the scale of the disaster has materially changed the country’s fiscal position.
What do int’l economists warn of?
The call, reported by The Guardian, follows the severe damage caused by Cyclone Ditwah, which struck Sri Lanka in late November and affected all 25 districts.
According to a World Bank Group Global Rapid Post-Disaster Damage Estimation (GRADE) report released on Monday (22), direct physical damage from the cyclone is estimated at $ 4.1 billion. The cyclone affected close to two million people and around 500,000 families, disrupting housing, livelihoods, infrastructure, and essential services across the country.
The group of economists argued that the environmental shock had significantly reduced the fiscal space created by last year’s debt restructuring. Before the cyclone, Sri Lanka’s annual debt repayments were projected to amount to about 25% of Government revenue, a level development campaigners had already described as high by international standards.
The economists warned that additional borrowing to finance recovery and reconstruction would further strain public finances unless repayments were suspended and debt terms revisited.
“Sri Lanka is now confronting a severe economic shock triggered by the recent cyclone, extensive flooding, and landslides, which has inflicted extensive damage to infrastructure, livelihoods, and key sectors of the economy,” the economists said in their statement.
They added that the disaster was likely to absorb, or potentially exceed, the limited fiscal space created by the 2024 restructuring, calling for the “immediate suspension of Sri Lanka’s external sovereign debt payments, and a new restructuring that restores debt sustainability”.
Sri Lanka’s debt
The intervention has reopened questions about the durability of Sri Lanka’s debt settlement.
Under the 2024 agreement, negotiated within the framework of the International Monetary Fund (IMF)-supported Extended Fund Facility, Sri Lanka secured substantial near-term relief through maturity extensions, interest reductions, and debt stock adjustments.
External debt service payments were decreased significantly during the IMF programme period, and major repayments were deferred until after 2028. The restructuring was designed to meet debt sustainability targets set by the IMF, including limits on public debt ratios, foreign debt servicing, and gross financing needs.
Official debt strategy documents issued by the Ministry of Finance indicate that the restructuring was calibrated to provide space for economic recovery while preserving incentives for fiscal reform.
Macro-linked bonds were introduced to align repayments with economic performance, while bilateral creditors granted capital grace periods. Domestic debt was also adjusted to help meet financing targets. Under baseline projections, debt indicators were expected to remain within sustainable thresholds if reforms continued and growth recovered as anticipated.
The damage
Cyclone Ditwah has raised concerns about whether those assumptions remain valid. The World Bank’s GRADE report highlights that infrastructure damage alone amounted to approximately $ 1.7 billion, accounting for 42% of the total estimated loss.
Damage to residential buildings and contents was estimated at $ 985 million, while agriculture suffered damage of about $ 814 million, affecting paddy, vegetable crops, livestock, and inland fishing. Non-residential buildings, including schools, health facilities, and businesses, accounted for a further $ 562 million in losses.
The report notes that the damage estimates cover only direct physical losses and exclude income losses, production disruptions, and the full costs of recovery and reconstruction. As a result, total economic costs are expected to exceed the $ 4.1 billion figure.
The assessment also points to existing socio-economic vulnerabilities, including poverty and exposure to climate risks, which may slow recovery and increase demands on public spending.
Perspectives of local economists
Despite these concerns, some economists argue that the cyclone does not automatically necessitate postponing debt repayments or reopening restructuring talks.
Verité Research Lead Economist Raj Prabu Rajakulendran said the economists’ call should be viewed primarily as highlighting Sri Lanka’s exposure to climate-related risks rather than as a definitive case for immediate renegotiation.
“I think this is mainly a call to show that Sri Lanka is very vulnerable to climate-related risk,” he said, noting that Sri Lanka’s debt restructuring did not incorporate climate-contingent clauses that provided automatic relief after disasters.
Rajakulendran pointed to countries such as Jamaica and Haiti, which had included disaster-related clauses in their debt instruments, allowing repayment terms to be adjusted when shocks occurred.
Sri Lanka, by contrast, must rely on discretionary discussions after a disaster. “We really need to have clauses and we need to think through how we are going to solve it and how it will appear when the risk is actually realised,” he said, adding that this was the main takeaway from the economists’ statement.
He also questioned the feasibility of reopening debt talks at this stage. Sri Lanka’s restructuring involved a wide range of creditors, including private bondholders, bilateral lenders, and domestic institutions, and was concluded only recently.
Rajakulendran said that mounting a strong case for fresh restructuring would be difficult without comprehensive data on the full fiscal impact of the cyclone and clarity on which categories of debt could realistically be renegotiated.
Frontier Research Head of Macroeconomic Advisory Chayu Damsinghe expressed a similar view, arguing that the World Bank’s damage estimates should not be interpreted as immediate fiscal costs.
“The damage that the World Bank talked about is not necessarily immediate cost,” he said, explaining that recovery and reconstruction spending typically occurred over several years rather than all at once.
From this perspective, the near-term debt service profile agreed under the restructuring remains manageable.
Damsinghe also pointed to recent performance as evidence that Sri Lanka could continue servicing its obligations under the current framework.
“We have managed it quite well this year,” he said, suggesting that the existing repayment schedule did not need to be altered solely because of the cyclone, provided macroeconomic discipline was maintained.
The funds
In the immediate aftermath of Ditwah, the World Bank mobilised up to $ 120 million from ongoing projects to support recovery and restore essential services, including healthcare, water supply, education, agriculture, and connectivity.
Sri Lanka has also sought rapid-disbursing support from the IMF to address short-term foreign exchange needs linked to disaster response, without reopening the broader IMF programme or debt restructuring framework.
The renewed debate has also taken on a political dimension. Opposition MP Harsha de Silva, responding publicly to The Guardian report, described the economists’ call as a repetition of arguments made during Sri Lanka’s 2022 crisis.
He noted that calls to suspend debt and revisit debt sustainability analysis were previously advanced by leaders of the current Government while they were in Opposition. De Silva argued that those positions were later abandoned once in office, citing concerns about feasibility, market access, and credit ratings.
In separate comments, de Silva stressed the need for climate-resilient reconstruction rather than short-term fixes, warning that maintaining reform momentum and creditor confidence was necessary to secure financing for rebuilding.
The economists’ group argues that Ditwah represents a shock large enough to warrant immediate relief through suspension and restructuring. Domestic analysts counter that the restructuring completed in 2024 already provides substantial near-term space and that the full fiscal impact of the cyclone will unfold over several years.
What is not disputed is that climate-related risks are becoming a more prominent factor in Sri Lanka’s debt sustainability.
Cyclone Ditwah has highlighted the absence of automatic mechanisms to adjust debt service obligations after disasters, increasing reliance on ad hoc financing and political negotiation.
Sri Lanka currently appears set to continue operating within the parameters of its existing debt settlement, using the fiscal space created by restructuring and external support to manage recovery costs.