Sri Lanka stands at a critical juncture. After weathering the worst economic crisis in its post-independence history, the country was now on a fragile path to recovery when cyclone Ditwah struck, leaving in its wake a trail of devastation and losses, many of which are yet to be calculated. The Government has announced its decision to develop a Post Disaster Needs Assessment (PDNA), which UN agencies have pledged to support. The full extent of damage to SL may only be known later on.
Recent news indicates that according to the World Bank Sri Lanka’s economic growth will slow to 3.5% in 2026 and 3.1% in 2027, down from an estimated 4.6% in 2025. This deceleration is attributed to persistent structural weaknesses, the lingering effects of the crisis, and subdued global demand. While remittances and tourism have helped to stabilise the external position, the country’s economic engine remains vulnerable. Tourism itself is vulnerable to global disruptions, many of which are beyond Sri Lanka’s control.
Yet, the most daunting test lies ahead: the recommencement of full external debt repayments in 2028. After a grace period secured through one of the longest sovereign debt workouts in modern history, Sri Lanka will once again face substantial annual obligations. According to the IMF, external debt service will hover around 3.7% of GDP annually from 2028, with gross financing needs just below 13% of GDP – both metrics sitting at the edge of sustainability thresholds.
The Government’s ability to meet these obligations hinges on unwavering fiscal discipline and the successful implementation of reforms. Some experts have warned that any slippage in fiscal or structural reforms could jeopardise hard-won stability. Political pressures, especially in the wake of elections, may tempt policymakers to ease off unpopular but necessary revenue measures and spending cuts. The IMF’s support and the credibility of the reform agenda are conditional; reality may not always cooperate with official optimism. The Government is under significant pressure to provide relief from many austerity measures and spending constraints, which have kept Sri Lanka in line with the IMF’s bailout plans, thus far. How long the Government can hold on to its rigid fiscal discipline is a question on everyone’s mind.
Sri Lanka’s debt restructuring has provided temporary relief, but the country’s bonds remain rated poorly by international agencies. The newly issued dollar bonds, despite restructuring, have not yet restored market confidence. Achieving a higher credit rating, such as ‘BBB+’ is essential for borrowing at sustainable rates, but this will require continued reforms and a clear policy direction, which the Government has yet to articulate.
The path to debt sustainability is fraught with social and economic costs. Austerity measures, restructuring of State entities, and tax hikes, often conditions attached to international loans, have disproportionately affected the working class, with many Trade Unions opposed to such measures. Sri Lanka is challenged in delivering public welfare and enabling the expansion of domestic production. The longer the austerity measures last, the more likely that there will be a public backlash – especially from vulnerable communities. Even as visible signs of the 2022 crisis, such as fuel queues and power outages, have receded, the underlying vulnerabilities remain. Further, the geopolitical environment is also stacked against Sri Lanka, with a trade war between Donald Trump’s United States and China, leaving Sri Lanka at the receiving end of a range of tariffs that the island nation’s fragile export economy now has to navigate through.
It is a misconception that Sri Lanka’s debt problem paused in 2022 and will only resume in 2028. The country has continued to service some multilateral and bilateral loans, using IMF disbursements and fresh financing. The real challenge post-2028 will be the resumption of commercial debt repayments, which constitute about a third of the total. The World Bank and IMF both caution that Sri Lanka’s recovery is highly vulnerable to shocks – be it from global interest rates, exchange rate volatility, or climate events. The country’s ability to absorb these shocks will depend on the resilience of its institutions, the effectiveness of its reforms, and the political will to stay the course. Without sustained growth and prudent fiscal management, the risk of a second default cannot be ruled out. Navigating the road ahead will be a test of our economic governance, social contract, and political resolve. The years ahead demand discipline, transparency, and a commitment to inclusive growth if the country is to avoid repeating the mistakes of the past and secure a stable future.