The Asian Development Bank (ADB) highlighted major policy challenges Sri Lanka faces in reducing medium-term debt vulnerability in its April 2025 Outlook report.
Although some progress has been made, Sri Lanka’s debt vulnerability remains high, requiring continued efforts to strengthen fiscal and external buffers.
Sri Lanka’s public debt surged to 126% of GDP in 2022 due to excessive borrowing, tax cuts, rupee depreciation, and state-owned enterprise liabilities.
Since 2022, the debt-to-GDP ratio has been gradually declining, supported by rupee appreciation, fiscal discipline, and debt restructuring.
The ADB expects this downward debt trend to continue with ongoing stabilization efforts, lower gross financing needs, and reduced interest rates.
However, the IMF’s sovereign risk and debt sustainability analysis (SRDSA) shows debt reduction to sustainable levels will take time.
The SRDSA aims for public debt to fall below 95% of GDP only by 2032, assuming the IMF program is completed by 2027 and debt restructuring stays on track.
High debt-related risks will continue to hinder economic growth and investment for years.
ADB noted that while debt restructuring has helped cash flow management, relief will begin to diminish from 2028 onward.
Debt service obligations will rise sharply from 2028 to 2038, potentially limiting investment in infrastructure and human capital.
To manage future risks, Sri Lanka must build fiscal and external buffers and avoid further distress.
Deep fiscal reforms alone are not enough; the country must secure concessional financing and rebuild reserves through current account surpluses and non-debt inflows.
Structural reforms are vital for sustainable, growth-oriented development.
The government has begun crafting a trade liberalization strategy, including a national export development plan, a new tariff policy, and the expansion of free trade agreements.
