IMF warns SL must entrench fiscal discipline to avoid repeat crisis

A September 2025 International Monetary Fund (IMF) Working Paper has said Sri Lanka's debt restructuring is nearing completion, but cautioned that fiscal discipline, stronger institutions, and careful debt management are essential to prevent a return to crisis.

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The report, titled 'Sri Lanka's Sovereign Debt Restructuring: Lessons from Complex Processes,' said spreads on the country's international bonds had fallen to post-restructuring norms and ratings agencies had lifted sovereign credit scores. Treasury Bill yields eased to around 8.5% by March 2025, and the Government shifted more borrowing into longer-dated Treasury Bonds, reducing refinancing risk.

Debt operations had eased the domestic overhang, while a banking crisis was avoided and private credit began to grow again.

But the IMF cautioned that "significant efforts in improving the debt management function are needed to fully restore the functioning Treasury Bond market Sri Lanka had before the debt crisis." The paper stressed that restructuring alone would not secure long-term stability. "It also requires continued prudent fiscal and macro policies and stronger institutions during and after the current Extended Fund Facility (EFF) arrangement. There is no room for slippage on the fiscal front," it said.

The IMF credited the Public Finance Management and Public Debt Management Acts as milestones but urged further reforms. These included a disciplined public investment program, transparent procurement, and rigorous cost-risk analysis of new borrowing. "A thorough cost-risk analysis before signing any new debt contract would help the authorities work out the debt service consistent with preserving sustainability," it said.

The report traced the debt crisis to weak public finances and external shocks. By 2019, Sri Lanka's tax revenues had fallen to one of the lowest levels among emerging markets. The COVID-19 pandemic exposed Balance of Payments vulnerabilities, while an overvalued exchange rate and heavy issuance of international bonds in the 2010s created mounting repayment pressures. Combined with lax fiscal policy, the result was a first-ever sovereign default in April 2022.