This Time Must be Different: Lessons from Sri Lanka’s Recovery and Debt Restructuring

IMF News, June 16, 2025

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Published: June 16, 2025

Achievements Resulting from Reforms Supported by the IMF-EFF Program

Crisis context: years of declining tax revenues, depleted foreign exchange reserves, and an explosive and unsustainable increase in public debt as growth collapsed; long lines for fuel, severe shortages of basic goods, record inflation, and widespread power outages.
Recovery indicators:
- Fuel, cooking gas, and medicines are available again.
- Inflation has been brought under control.
- Economic growth expanded by 5 percent in 2024.
- Tax revenues have increased by more than two-thirds as a share of GDP.
Governance and structural reforms:
- Central bank independence established.
- Improvements in public financial management.
- Strengthening of the legal framework for anti-corruption.
- IMF analysis: comprehensive fiscal governance and accountability reforms in Sri Lanka can boost GDP by more than 7 percent and reduce the debt-to-GDP ratio by more than 6 percentage points over 10 years.

Debt Restructuring: Actions, Outcomes, and Stylized Facts

Decision and outcomes:
- Sri Lanka defaulted on public debt and pursued a sovereign debt restructuring.
- External creditors have forgiven $3 billion in debt and restructured another $25 billion, extending repayment over two decades at lower interest rates.
- Sri Lanka’s bonds are once again included in global indices, and its credit rating has improved.
Restructuring calibration and projected impact:
- Over the next decade, external debt service as a share of GDP is reduced by a half.
- External and total debt stock will fall by 27 and 34 percentage points of GDP respectively.
Domestic debt considerations and stability measures:
- A large share of Sri Lanka’s debt is domestic.
- Authorities avoided nominal debt reductions and focused on lowering interest rates and lengthening maturities to preserve financial and social stability given significant exposures of the domestic financial sector, the central bank, and the public pensions vehicle to government debt.

The Nexus between Economic Reforms and Debt Restructuring (Lessons Learned)

Calibration challenges:
- Targets must restore debt sustainability via debt relief and policy adjustments (fiscal effort), and be country-specific.
- Sri Lanka’s targets reflected crisis severity as well as strengths: high levels of private savings, tourism receipts, and remittances.
Creditor coordination:
- A full range of official creditors needed coordination; not all had internal processes to deliver swiftly.
- The Official Creditor Committee chaired by France, India and Japan shepherded many creditors; China informally coordinated with this group.
- IMF staff provided information and used IMF “good offices” to support coordination.
- Persistent challenges: information sharing across creditor groups and concerns about comparability of treatment across official bilateral creditors.
Methodological and institutional improvements:
- Sri Lanka’s experience directly led to improved methodologies for evaluating state contingent features in debt contracts and new instrument designs.
- Global initiatives: Global Sovereign Debt Roundtable convened by the IMF, Bank and G20 Presidency; a restructuring playbook published at the time of the Spring Meetings lays out typical steps and an indicative timeline.
- Timeliness gains: Ghana’s case took five months from IMF staff level agreement to delivering the financing assurances required for program approval—roughly half the time it took for Chad in 2021 and Zambia in 2022.
- Ongoing work to improve timeliness and effectiveness of the global debt architecture will continue.

Policy Imperatives and Recommendations: Stay the Course

Fiscal and governance priorities:
- Continue macroeconomic stability and steadfast implementation of sound fiscal policy to bring down high domestic debt.
- Implement the government’s action plan on governance reforms; major reforms needed to tackle corruption.
- Sustain comprehensive fiscal governance and accountability reforms to realize gains in GDP and debt reduction (see above figures).
Social inclusivity and public engagement:
- Ensure reforms are inclusive and accountable through public dialogue, transparency, and engagement with civil society across the island.
- Recognize the sacrifices made: poverty rates at 24.5 percent in 2024 (World Bank estimate) are too high and need to be reduced quickly.
Risk management and vigilance:
- No room for policy errors given global risks—slowing growth, rising tariffs, geopolitical conflict, and economic fragmentation—that disproportionately affect small open economies like Sri Lanka.
- Historical risk: of the 16 IMF programs Sri Lanka has engaged in over the years, about half ended prematurely; reform fatigue can reverse gains.
- Avoid repeating past cycles: sustain reform momentum to ensure this is the last IMF program Sri Lanka will need.
Specific debt-management approach:
- Where domestic debt is significant, prioritize measures that preserve financial and social stability—e.g., lower interest rates and lengthen maturities rather than nominal haircuts.

Closing Message

Leadership and popular commitment were central to recovery; continued courage, sacrifice, and steadfast policy implementation are required to make the recovery durable.
Encouragement to use platforms like this conference to foster dialogue, challenge assumptions, and build consensus.
“This time must be different!” — a call to ensure Sri Lanka does not need another IMF program if it stays the course.

Opening Remarks by the IMF First Deputy Managing Director Gita Gopinath, Conference on “Sri Lanka’s Road to Recovery: Debt and Governance”, Shangri-La Hotel Colombo, June 16, 2025.