Alternative external debt restructuring strategy framework

IMF-guided debt restructuring agreements fail to offer sustainable solution to Sri Lanka's external debt crisis Debt servicing targets must be aligned with country's actual capacity to pay, and not with GDP The Institute of Political Economy (IPE) launches new report entitled "Alternative external debt restructuring strategy framework: Aligning with Sri Lanka's foreign currency earnings and capacity to pay

- by Charith Gunawardena and supported by Professor Jayati Ghosh

THE report 'Alternative external debt restructuring strategy framework' by Charith Gunawardena and supported by Professor Jayati Ghosh, outlines how the world stands at a critical crossroads on economic matters, where Sri Lanka is no exception.

The absence of any acknowledgment by the First Deputy Managing Director of the IMF, Gita Gopinath, during her recent visit to Sri Lanka, of the unsustainable nature of the country's external debt restructuring agreements only underscores the difficult road that lies ahead.

The Trump administration's policy priorities, from focusing narrowly on trade imbalances, downplaying the urgency of the climate crisis, and maintaining a deep faith in market-based solutions for social issues, is likely to compound challenges Sri Lanka already faces.

In 2022, the country defaulted on its external debt for the first time, plunging its economy into crisis. In response, it secured its 17th loan program from the International Monetary Fund (IMF). Repeatedly returning to IMF programs reflects a pattern of deeper structural dependency rather than a path to sustainable recovery. Yet, the existing deal is increasingly seen by many economists as a temporary fix that may lead to another default as early as 2028.

The crux of the issue lies in the mismatch between Sri Lanka's foreign debt obligations, the abysmally low debt reduction (or haircut), and its actual capacity to repay. The current agreement is based on a flawed IMF Debt Sustainability Analysis (DSA), which makes overly optimistic assumptions about economic growth, foreign currency inflows, and debt servicing capabilities. Without fundamental changes to this framework, the deal risks worsening inequality, undermining long-term development, and locking the country into yet many more cycles of austerity and dependence.

IMF's current strategy and its failures