Why Sri Lanka cannot avoid borrowing from international bondholders in 2028?

THIS is a critical question that Sri Lanka needs to start thinking about now itself. Though, Moodys and Fitch have upgraded us from selective default status, S&P still has Sri Lanka at selective default status. Sri Lanka has yet to come fully out of default status. The year 2028, is when external debt repayments are coming due. What is Sri Lanka's position?

- By Talal Rafi

Why is there no other option but to go back to international bondholders?

From a macroeconomic perspective, Sri Lanka is doing well. It has outperformed expectations with inflation coming down from 70% to deflation point. Its currency is stable and its current account is in the positive. Credit has to go to the present Government for maintaining economic stability.

Sri Lanka has a large trade deficit of around $ 6 billion annually but this is largely offset by remittances. So Sri Lanka's current account is set to be positive for this year too. But starting 2028, Sri Lanka is due to repay its external debt obligations which could come out to around $ 3 to $ 4 billion a year as the IMF requires Sri Lanka's external debt payments to be below 4.5% of GDP. This is where the issue starts. At present, the current account is slightly positive due to a pause in external debt repayments to bilateral and ISB bondholders. But in 2028, payments to bilaterals and bondholders will become due.

Where can Sri Lanka get the $ 3-4 billion a year starting from 2028 to replay our debt obligations?

Exports - One option is to get our exports up but this requires structural reforms in trade liberalisation and trade facilitation. We only have two and a half years to go and this is a tough challenge to make the needed reforms and get the industries needed to produce these. 70% of global trade is supplying global value chains of multinational companies. Sri Lanka has missed this bus due to being a protected economy. Even if Sri Lanka immediately starts setting new export industries and liberalising trade, the results will take at least five years to come in. So this is not likely to solve the problems coming in 2028. Our current export industries have limited space to expand exponentially. With the Trump Tariffs and global uncertainty, it will be even more challenging for Sri Lanka to grow its exports in the next three years.