By: Staff Writer
October 04, Colombo (LNW): Sri Lanka’s recent sovereign debt restructuring carries significant upside risks—if the economy outperforms expectations, the nation may be locked into additional payments of US$150 million to US$270 million annually from 2028 through 2038, according to a new IMF working paper on “Sri Lanka’s Sovereign Debt Restructuring: Lessons from Complex Processes.”
The root of this exposure lies in macro-linked or state-contingent bonds (SCDIs) issued during the restructuring process. These instruments tie future debt payments to the country’s economic performance. In Sri Lanka’s case, triggering events depend on achieving minimum thresholds for dollar-denominated GDP and cumulative real growth over multiple years. Once triggered, higher payments become a fixed featureregardless of whether performance weakens later.
Specifically, the IMF report outlines that three scenario triggers are in play: if Sri Lanka’s average USD GDP between 2025 and 2027 exceeds thresholds of US$94 billion, US$99 billion, or US$107 billion, and if real GDP growth cumulatively over 2024-27 surpasses 11.5 percent, then the higher payment tier will be activated permanently (for a decade).
The IMF underscores that while state-contingent debt terms are designed to share upside gains with creditors and mitigate risk under volatility, they also introduce complex new vulnerabilities. Once payments ratchet upward post-2028, they cannot be easily reversed—even in an economic downturn. Moreover, these instruments carry political risk: if higher payouts are perceived as socially unfair, they may become contentious domestically.
Although the IMF itself does not draft the detailed design of such bonds, the Fund plays a central role in assessing whether they are consistent with debt sustainability goals. Its evaluation framework (the Sovereign Risk and Debt Sustainability Framework, or SRDSF) uses large-scale simulations to test whether such arrangements would increase the likelihood of breaching key debt or financing targets under adverse or extreme scenarios.
In Sri Lanka’s case, the IMF judged that the arrangement meets its internal criteria: the probability of breaching debt-to-GDP or gross financing needs thresholds stays within acceptable bounds, and even in the worst 10 percent of outcomes the additional burden remains relatively modest (at most 0.4 percent of GDP). Importantly, the additional annual payments are capped at about US$250 million.
Still, the IMF cautions that no modelling can perfectly capture uncertainty, and residual risks remain. Moreover, distinctions matter: some analysts argue the new bonds are not true state-contingent debt after 2027beyond that point they function as standard fixed-coupon bonds, so future shocks may no longer modulate payments.
Sri Lanka has meanwhile posted strong recent performance: growth rebounded by approximately 5 percent in 2024, and revenue mobilization has surged, helping stabilize macro conditions.
The IMF has completed multiple reviews of its Extended Fund Facility for Sri Lanka, supporting the country’s reform agenda and debt restructuring process.
But the broader picture is one of conditional relief: while Sri Lanka may benefit from significant debt relief under its deal, it is also exposed to higher debt service if performance is strong and that exposure may persist even through downturns.
The design of SCDIs thus offers a double-edged sword: sharing gains with creditors comes at the cost of locking in future risks. As Sri Lanka moves toward restoring stability, its macro-debt trajectory remains intricately tied to both growth outcomes and the structural safeguards built into its debt instruments
