IMF warns debt risks remain high as repayment capacity tightens

SRI Lanka's debt restructuring has delivered measurable relief, but debt risks remain elevated and the country's capacity to repay the International Monetary Fund (IMF) has come under added strain following Cyclone Ditwah, according to the IMF's December staff assessment.

- 

While public debt dynamics have improved materially since the 2022 crisis, IMF staff cautioned that fiscal discipline will be critical as Sri Lanka balances recovery, reconstruction, and debt sustainability. The Fund said the gains achieved through restructuring could be undermined if emergency and reconstruction spending are not carefully managed within existing fiscal rules.

Between 2022 and 2024, Sri Lanka's public debt declined from 125.8% of GDP to 105.7%, while gross financing needs fell from 33.9% of GDP to 21.9%. Interest payments relative to Government revenue also eased sharply, declining from 79% to 56%. Despite these improvements, the IMF said post-restructuring debt indicators remain high, requiring a calibrated fiscal strategy to preserve sustainability while supporting economic recovery.

The assessment placed particular emphasis on adherence to the Public Financial Management Act (PFMA) in deploying emergency spending. IMF staff said any supplementary allocations under the 2026 Budget should be used only when funding needs cannot be met through Budget reallocations, the annual Budget reserve, or the Contingencies Fund. Any breach of the primary expenditure ceiling, the Fund noted, would need to be justified under the Act's escape clauses and accompanied by a recovery plan and corrective measures in subsequent budgets.